The Reserve Bank of Australia (RBA) has again left the door open for cut in interest rates after flagging Wednesday’s inflation data as potentially paving the way for such a move.
RBA deputy governor Ric Battellino said the consumer price index (CPI) data for the September quarter would provide further information on whether to ease monetary policy.
He said that with domestic inflation cooling and world economies looking increasingly unstable, there may be scope to lower the cash rate.
“Inflationary pressures … appeared to pick up noticeably in the first half of 2011 and the prospects were that inflation would rise to above the target range of two to three per cent over the next couple of years,” Mr Battellino said in an address to an investment conference in Sydney, on Tuesday.
“The downward revisions to recent estimates of underlying inflation and the softer global economic outlook have made the outlook for inflation less concerning, providing scope for monetary policy to be supportive of economic activity, if needed.”
Mr Battellino said Australia’s economy could be further affected by global uncertainties and financial market volatility.
He said there was a sense that global growth forecasts were fragile because of possible severe downside risks.
This would require “careful monitoring”, he said.
“The situation in Europe is particularly disturbing since the authorities need to agree on policies that deal simultaneously with excessive government debt, weak banking systems, soft economic activity and sharp differences in competitiveness among European countries.
“It remains to be seen how the Australian economy will respond to the recent financial volatility and the consequent fall in confidence and the loss of wealth.”
The situation was not all gloomy, however, with US economic data surprising on the upside, more often than not, over the past month or two, he said.
“Asia is also generally continuing to do well, and some of the local economic news has also been more positive of late.”
Market watchers have been expecting inflation to stay high, which they say makes an imminent cash rate cut unlikely.
According to an AAP survey of 12 economists, headline CPI, to be published by the Australian Bureau of Statistics, is forecast to have risen by 0.6 per cent in the September quarter and 3.5 per cent in the 12 months to September.
For underlying inflation, which excludes sharp movements in some categories, the median forecast was 0.6 per cent in the September quarter for an annual rate of 2.6 per cent.
The RBA uses the cash rate as its main weapon to keep the annual rate of headline inflation between two and three per cent on average over the course of an economic cycle.
It has kept the cash rate at 4.75 per cent since November 2010 and will meet for its next board meeting on November 1.
