World Economic outlook - Australia interest rates forecast february 2012 : Economist's believe the rate of inflation is slowing, giving the Reserve Bank more room to cut interest rates in February
The falling inflation rate is good news for families worried about the cost of living. And it's also good news for homeowners and prospective property buyers hoping February will bring another cut to interest rates.
But that all depends on official inflation figures next week, which are expected to show an easing of underlying cost pressures as the economic continues to cool. The Australian Bureau of Statistics will on January 25 publish Consumer Price Index figures for the December quarter.
An AAP survey of 12 economists found a median forecast for a 0.2 per cent rise in headline inflation and a 0.6 increase in underlying inflation during the quarter.
That would take the annual headline inflation rate to 3.3, while the underlying rate would be 2.5 - smack bang in the middle of the Reserve Bank of Australia's (RBA) target range of between 2 and 3 per cent.
By comparison, headline inflation rose by 0.6 per cent and underlying inflation by 0.3 per cent during the September quarter.
National Australia Bank senior economist Spiros Papadopoulos said a lower inflation figure would allow the Reserve Bank to cut interest rates as it responded to a worsening global economic outlook stemming from the European debt crisis.
'If we were to see a 0.5 per cent outcome for the underlying rate, or even better than that, it would certainly give the RBA a little more room to manoeuvre.
'From that perspective it, would allow them to cut interest rates again.'
RBC Capital fixed income strategist Michael Turner said a lower inflation figure would provide the RBA with enough of a benign inflation background to ease rates further, which was expected in February.
A drop in fruit and vegetable prices, which spiked earlier in 2011 following a series of natural disasters, accounted for much of the expected decline in the headline rate.
'We think the headline (figure) will be dragged down by fruit and vegetable prices, as the earlier impacts of the floods and cyclone in Queensland continue to unwind,' ANZ senior economist Craig Michaels said.
Mr Michaels said Australia's struggling retail sector would also drag inflation down as businesses discounted goods to attract customers.
However, increasing utility and petrol prices were expected to partly offset some of the price falls.
Mr Michaels said inflation was expected to remain low throughout the year with the RBA's own forecasts showing it within its target band until 2013.
For mortgage holders that could mean a series of rate cuts this year, although most economists believe it will be the global economy and not domestic conditions that will drive the RBA's thinking.
'I think inflation is off the radar at the moment,' Mr Michaels said. 'In the next 12 months, it's not a major factor and next week's CPI will probably confirm that.'
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