News that inflation fell to 3.1% in the year to December has given further hope to homeowners awaiting a further interest rate cut.
The consumer price index was unchanged in the final quarter of 2011, figures from the Australian Bureau of Statistics show, marking the best inflationary performance since December 2008.
The figures are being attributed to falls in the price of food and white goods. Underlying measures of inflation are also mellow, averaging 2.6% annually.
Australia’s grip on monetary policy gives the Reserve Bank plenty of scope for interest rate cuts when it meets for the first time in 2012. Lower economic growth estimates and a deteriorating labour market are also driving expectation for rates to be reduced.
Treasurer Wayne Swan has hinted that cuts may be forthcoming.
"With underlying inflation sitting squarely in the RBA's target band, [this] does create room for further interest rate cuts," he said.
Championing Australia’s economic groundwork, Mr Swan noted that Australia was ‘uniquely placed’ to deal with the difficulties of the global economy.
Concerns that banks may not pass on a full cut of 25 basis points may force the Reserve Bank to cut more aggressively. The treasurer faced an uncomfortable stand-off with Australia's major banks in late 2011 after they showed increasing reluctance to pass on central interest rate cuts to consumers.
The likelihood that banks will refuse to pass on a full cut owing to a continued rise in the cost of funding may prompt a pre-emptive move from the RBA to ensure that consumers are able to gain.
But further cuts would not upset monetary control, suggested Westpac chief economist Dr. Bill Evans, who accurately predicted the course of monetary policy in 2011.
"Even at four per cent there is scope for the board to go further given the benign outlook for inflation. Indeed, we expect a follow-up move in May".
With expectations rising for interest rate cuts, why not secure the best savings deals now before they deteriorate?
Mark Hornby
