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CPI won't stop rate rises, says Economist
By AAP | 25.01.2011

Weaker than expected inflation figures for the December quarter may not prevent interest rate rises in 2011, as the nation adjusts to higher costs after the Queensland floods.

The consumer price index (CPI) rose by 0.4 per cent in the December quarter, for an annual headline inflation rate of 2.7 per cent, official data released on Tuesday shows.

The market forecast had been for the CPI to rise 0.7 per cent in the quarter, for an annual pace of 3.0 per cent.

Meanwhile, the interest rate sensitive underlying measure came in at 0.4 quarter on quarter and 2.3 per cent year on year, the lowest in a decade.

It was within the Reserve Bank of Australia's (RBA) two to three per cent target range, where the central bank aims to keep the inflation rate.

JP Morgan economists Ben Jarman said he doubted the underlying inflation figure would stop the central bank from raising the cash rate.

"There might be a knee-jerk reaction here that the RBA has some time (before raising the cash rate)," he said.

"But they can't wait too long."

The central bank took the cash rate higher four times in 2010, from 3.75 per cent to its current 4.75 per cent.

Mr Jarman said he expected there to be inflationary pressures stemming from the reconstruction effort in Queensland after the state was devastated by recent flooding.

"We are still coming to grips with the impact of those floods," he said.

The Australian dollar slid after Australian Bureau of Statistics released the CPI data on Tuesday morning, as expectations of a near term interest rate rise waned.

The local unit fell from its intra day high of 99.82 US cents to 99.30 cents in the minutes after the survey was released at 1130 AEDT.

Commonwealth Bank economist James McIntyre said the impacts of the high Australian dollar and competitive discounting between the retailers helped ease inflationary pressures.

"Not something the RBA would want to hang their inflation hat (on) in a fully employed economy that is facing up to not only a massive mining boom, but also looking at a massive flood reconstruction task."

Mr McIntyre said new resource and energy projects would add to inflationary pressures brought on by the floods.

"We'll have roughly about another $35 billion of projects announced or given an investment decision in Queensland," he said.

Santos Ltd and its partners has a $US16 billion ($A16.11 billion) coal seam gas project in Gladstone, while British-owned BG Group Plc has approved the $US15 billion Curtis Island LNG project, also near Gladstone.

"So not only is the Queensland economy going to have a floods reconstruction stimulus, but that activity is going to be butting up against a massive impact on the Queensland economy," he said.

"We're all aware of the stimulatory impact that is having in WA, and Queensland is going to get a double dose."

Mr McIntyre said the lower than expected December quarter CPI could see the RBA stay on hold into the September quarter of 2011.

HSBC chief economist Paul Bloxham said the CPI figures were significantly below market expectations.

"There was less inflationary impulse in the economy in late 2010 than the markets had anticipated and, indeed, than the Reserve Bank of Australia had itself anticipated," he said.

"They've managed to get some of the inflationary impulses they were concerned about out of the economy."

With low unemployment and a strong overall economic outlook, Mr Bloxham said he expected inflation to rise.

"(That) means that it's likely that the Reserve Bank will need to continue to lift interest rates."

 



24th-January-2011

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