Inflation Widens Scope for Interest Cuts in Australia


The increase in consumer prices proved to be lower-than- expected in the fourth quarter, widening the scope for the Reserve Bank of Australia to cut down on interest rates to help lift the weakened economy. Also, the low rate of inflation pushed the Australian dollar to depreciate.

RBA to trim interest rates

Australia witnessed an increase in its Consumer Price Index (CPI) which turned out to be lower-than-expected increasing the possibility of cuts in interest rates by the Reserve Bank of Australia. The annual rate of inflation in Australia saw an increase in the Consumer Price Index to 2.2 percent in the December quarter of 2012. There had been a slight increase in consumer prices since September 2012 by 0.2 percent. However, the increase in the consumer price failed to meet the expectations of the economists. The Australian CPI was predicted to increase by 2.5 percent in the fourth quarter. With a weaker outcome than expected the Reserve Bank of Australia aims to cut down interest rates. Analysts expect the RBA to reduce interest rates. The interest rates are to be revised and repositioned at an upcoming meeting on the 5th of February held by Glenn Stevens, the Governor of the Reserve Bank of Australia.

The official cash rate held by the Reserve Bank of Australia is estimated at 3 percent of the total overnight money market in Australia. The subdued rate of inflation has urged the central bank to reconsider its inflation rate and keep it on an average range of 2 to 3 percent. The rates of various consumer goods declined after the CPI did not meet the expected reading. Vegetable prices dropped by 5.6 percent, while pharmaceutical products declined by 3.5 percent in the fourth quarter of 2012. Non-alcoholic beverages and healthcare products saw a similar decline as well. Also, the transportation costs and clothing witnessed an increase by around 0.8 percent. Melbourne and Canberra were hit quicker by the rise in prices than Sydney and Darwin.

Australian Dollar Depreciates

Due to the inability of the Consumer Price Index to reach its desired increase in price, the Australian dollar weakened against the New Zealand dollar and other major currencies. Following the reading of CPI, the Australian dollar fell to $1.0535 from $1.055 on the 23rd of January. The Australian dollar declined by 0.3 percent while the Japanese yen popped higher than the Australian dollar by 0.6 percent. The Australian dollar had gained market share against the Japanese yen by 14 percent in 2012.

The New Zealand dollar remains higher than the Australian dollar with likely to hold $0.8400 in the market. With a similar fall in the Japanese yen, other currencies have an edge over the Australian dollar and the Japanese yen.

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