The rate of inflation has slowed but economists are divided on whether there will be an interest rate cut in the coming months.
The market is also keenly awaiting to see if European leaders will resolve the eurozone government debt crisis, which is considered a threat to global economic growth.
The Reserve Bank of Australia’s (RBA) adjusts the cash rate to keep the inflation rate in a target band of two to three per cent on average over the medium term.
It has also been known to cut the cash rate to stimulate growth in times of economic trouble.
The headline Consumer Price Index (CPI), the key measure of inflation, came in exactly as expected, posting a rise of 0.6 per cent in the September quarter, for an annual inflation rate of 3.5 per cent.
Underlying inflation, which excludes extreme price movements in some categories, rose 0.3 per cent in the September quarter for an annual pace of 2.5 per cent, the Australian Bureau of Statistics said on Wednesday.
Market forecasts for the underlying CPI centred on a rise of 0.6 per cent for the September quarter and 2.6 per cent for the 12 months to September.
HSBC chief economist Paul Bloxham said the RBA’s preferred measure of underlying inflation, fell and was lower than market expectations.
“The RBA must be very happy with this result,” he said.
“It is now clear that they will be able to forecast inflation remaining in the target band over the forecast horizon, thanks to a lower starting point.
“But to motivate a rate cut they would need to indicate that inflation was either going to stay at the middle of the target band, or head into the lower part of the band from here.”
Mr Bloxham expects the RBA to keep the cash rate at 4.75 per cent at its November board meeting on Tuesday.
He said the Australian economy was unlikely to suffer from a European shock because China, our biggest trading partner, would keep posting solid economic growth.
The Australian dollar fell by more than half a US cent after the release of the inflation figures.
The local unit fell to 103.77 US cents at 1132 AEDT compared to 104.32 US cents just before the figures were released at 1130 AEDT.
JP Morgan economist Ben Jarman said traders sold their Australian dollars on speculation that the lower than expected underlying CPI figures added to the case for possible cuts to the cash rate.
“It certainly means the RBA’s got more scope to ease policy, if things get worse offshore,” he said.
“We don’t think that they’re quite over the line with that yet.”
UBS interest rates strategist Matthew Johnson is expecting the RBA to cut interest rates because of global economic worries and declining local inflation.
“There will probably be cuts in November and December and then we’ll see what happens,” he said.
“Our expectation is that Greece will default, although we think it will be orderly,” Mr Johnson said.
“If that happens, it’s pretty hard to see global inflation being a problem next year.”
