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Low Australian Inflation Keeps Rate Cut on Table -- Update

25 Jan 2017 5:23 am
By James Glynn 

SYDNEY--Inflation in Australia slowed on a quarterly basis at the end of last year, creating more room for the central bank to lower interest rates again if the economy continues to lose momentum.

Consumer prices rose by 0.5% in the fourth quarter compared with a 0.7% gain in the previous three months, the Australian Bureau of Statistics said Wednesday. Economists had expected consumer prices to maintain the 0.7% pace of rises in the last three months of the year. On a year-over-year basis, the inflation figures showed a slight acceleration to 1.5%, though analysts had expected prices to rise by 1.6%.

Economists said that while the data wasn't a "smoking gun" that would see the Reserve Bank of Australia rush to lower interest rates when it meets at the start of February, policy makers might yet be called into action later in the year if the economy continues to falter.

Core inflation, which is more central to policy making at the RBA, rose by an average of 0.4% in the quarter, compared with 0.5% expected by economists.

Weak inflation outcomes throughout 2016 led the central bank to cut interest rates twice, taking its cash rate target down to a record-low 1.50%.

Shane Oliver, chief economist at AMP Capital, said inflation is likely to take longer to rebuild a head of steam than expected given record-low wage growth, spare capacity in the job market and below-average economic growth.

The virtual absence of price pressures and sluggish GDP growth might see the central bank lower its cash in May, he added.

The RBA has indicated a reluctance to ease policy again, pointing to an overheated housing market and fears that lower mortgage costs will worsen the problem.

Already among the most expensive homes in the world, Sydney house prices continued to surge by well over 10% in 2016, adding to a mountain of household debt.

Gareth Aird, economist at the Commonwealth Bank said that while inflation was soft, it appears to have bottomed. The data reflects tepid wages growth across the economy, but it looks like the worst of ultra-benign inflation prints is now over, he said.

For Mr. Aird, that means the RBA is likely finished cutting interest rates, albeit the timing of a future increase is likely is well off into the future.

Still, a trigger for an interest rate cut could emerge if the resource-rich economy fails to recover from a deep contraction in the third quarter. GDP growth fell by 0.5% in the third quarter of last year from the second, surprising most economists, and raising the potential for a first recession in 25 years.

Unemployment has also begun to nudge up, raising another red flag over the economy. If the jobless rate continues to lift, some economists argue the RBA will have no choice but to cut rates again at some point.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

January 25, 2017 00:23 ET (05:23 GMT)

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