The way is now clear for the Reserve Bank to cut rates by 1% next Tuesday as slowing inflation and the slowing economy heap pressure on the central bank to match December’s chop of the same size.
The December quarter consumer price inflation figure has now given the RBA the leeway to make another significant cut in the cash rate, currently at 4.25%, to maintain the "expansionary" monetary policy it formally adopted at the December meeting of the board.
As expected consumer price inflation fell to an 11 year low in the December quarter to produce a noticeable easing in price pressures in the economy, especially for petrol, but not for food costs which jumped in the closing months of last year.
Figures from the Australian Bureau of Statistics revealed a fall of 0.3% in the CPI, in the quarter, to make the 2008 year rate 3.7%. That compares with the sharp 1.2% jump in the September quarter and an annual rate of 5.0%.
The December quarter CPI figures are the weakest since the September quarter of 1997.
The Reserve Bank’s version also eased from an average annual rise in the September quarter of 4.7% for the trimmed mean and the weighted median (the RBA’s two measures), to 4.35% in the December quarter.
Not as dramatic as the headline rate, but still a softening.
The headline rate was a touch under the market forecast for a fall of 0.4% and an annual rate of 3.6%.
The cash rate is now well above the annual inflation rate of 3.7% and the RBA board said in December in cutting rates by 1% that it had "judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting.
As a result of today’s decision, the cash rate will be at its previous cyclical low point."
Well that was when the CPI was 5% and the RBA’s measure was an average 4.7%.
The CPI has now fallen well under the cash rate and the RBA’s measure is now within 0.10% of the cash rate, so another big rate cut is needed to make sure the expansionary nature of monetary policy is preserved, especially with the global economy worsening since early December and some early signs of an accelerating slowdown here.
New Zealand cut its Official Cash Rate this morning by 1% to 4.0% and the Kiwi economy is in far worse shape than ours, with a continuing recession. NZ was late cutting deeply, so far our Reserve Bank has been ahead of the game.
Certainly there was enough encouragement from, the CPI for a another rate cut of 0.75% to 1% to be contemplated.
The ABS said that excluding "housing, Financial and Insurance services’ the fall in the quarter was a larger 0.7% and the rise over the year was a much smaller 2.4%. In the September quarter the ABS said the rise without finance, housing and insurance was 0.7% and the annual rate was 3.8%, so the impact of price cuts other than interest rates can be seen.
The big influence was a 6.9% drop in the cost of transportation in the quarter and a fall of 1.2% over the year. In the September quarter there was a 1% rise and the annual rate was 8.7%, so the extent of the impact of the sharp fall in oil prices can be seen.
The ABS said the most significant price falls this quarter were for automotive fuel (-18.2%), motor vehicles (-2.4%), deposit and loan facilities (-1.9%) and pharmaceuticals (-4.7%), while the most significant offsetting price increases were for rents (+1.8%), fruit (+8.0%), tobacco (+1.7%) and take away and fast foods (+1.5%).
There had been thoughts that there might be a small rise in the CPI after the slumping Australian dollar pushed import prices and producer prices up by more than expected in the quarter.
An end to falling fruit and vegetable prices was also seen in the PPI and was thought a possible cause of a sharper than expected figure.
But that wasn’t to be, even though Woolworths said in its interim and second quarter sales figures today that food price inflation jumped to an annual 4.8% in the December three months from 3.2% in the September quarter as "the deflation in produce ceased".
The rise wasn’t enough to offset the impact of the slump in oil and petrol prices in the quarter.
Food costs rose 2% in the quarter, from a 1.4% increase in the September period with a rise in the annual rate to 5.6% from 3.4%.
There was also a rise in the cost of clothing in the quarter and over the year as a fall in the September quarter was turned into a rise in December.
But figures also released, this time from The Department of Education, Employment and Workplace Relations (DEEWR), reveals the sharp fall in demand for skilled labour over the past year, a pointer to rising levels of jobless in the months ahead.
The figures showed there was a 7.7% fall in skilled job vacancies in January, with the department’s skilled vacancies index hitting 56.1 points this month, 43.4% lower than in January 2008.
Vacancies fell in all three occupational groups monitored by the department.
Trade vacancies declined 10%, associate professionals fell 8.8% and professionals dropped 4%. The departments aid the fall skilled vacancies was widespread, with decreases also evident in 17 of the 18 professions monitored.
The only occupation to rise was medical and science technical officers, increasing 2.9%.
All states and territories experienced decreases in skilled vacancies in January, the largest drop being 10.4% in NSW; while all states and territories reported falls in the year to January, with NSW again leading the way w
