CPI a possible green light to rate cut

TAME inflation figures have given the green light to the RBA for an interest rate cut, but a prudent central bank would think twice before stepping on the accelerator.

WITH a rise in consumer prices of 0.5 per cent in the September quarter, a seasonally strong quarter, annual growth in the consumer price index stayed at 1.5 per cent, Australian Bureau of Statistics figures on Wednesday showed.

That was the fourth consecutive quarter the official inflation rate came in below the two to three per cent band the Reserve Bank of Australia tries to keep the inflation rate inside, on average over time.

The figures favoured by the RBA as a better guide to inflation's underlying momentum averaged just 2.15 per cent over the year.

And the non-tradables goods and services, the two thirds of the CPI seen by the RBA as a gauge of domestic inflationary pressure, was up by only 2.6 per cent through the past year after a 2.5 per cent rise the year before, a big step down from an average 3.6 per cent a year over the preceding decade.

These numbers should reassure the RBA that inflation is dormant.

Not that it should need reassurance.

Wages growth is currently at a low ebb typically seen during severe recessions, while the broadest measure of cost pressures - nominal unit labours costs - was virtually the same in the June quarter as it was three years earlier.

What's more, a major source of anxiety for the RBA recently, the booming housing markets in Sydney and Melbourne, has faded.

Those markets were showing signs of stalling even before the big banks recently jacked up their home loan rates to pass on the cost of more stringent capital requirements.

So there's little stopping the RBA from cutting the cash rate from 2.00 per cent to 1.75 per cent next Tuesday.

If it wants to.

And that's a big "if".

In the minutes of its board's latest monetary policy meeting on October 6, released last week, the RBA was cautiously upbeat about the economy.

There was no real hint that a rate cut was under consideration.

That was before the home loan rate rises, of course.

But a rate cut to restore home loan rates is likely to be seen by the RBA as a significant risk.

It would not just be saying to home-buyers that happy days are here again, but suggesting to them that happy days are here permanently, a sentiment that can quickly rekindle an overheated housing market.

The RBA might validate market expectations, currently putting a rate cut next week at about two in three, from one in three ahead of the CPI figures.

But the central bank ought to be more inclined to wait and see what effect, if any, the home loan rate rises have on demand for home loans.