Inflation surge dashes rate cut hopes: Economy roundup

Hopes of an interest rate cut this year have dived following a stronger than expected 4.2% annual inflation figure today.

The consumer price index (CPI) surged 1.3% in the first three months of 2008, producing a big annual inflation figure of 4.2% and defying market expectations of quarterly rise closer to 1%.

Significantly, the core annual CPI result – the figure the Reserve Bank of Australia looks at most closely in deciding if it will lift or cut interest rates – has jumped to almost 4.3%, smashing the RBA’s target band of 2% to 3%.

TD Securities senior strategist Josh Williamson says the result means there is now next-to-no-chance of a rate cut in the short term.

“It is an upside surprise, and what it really means is that those in the rate cut camp will put back their view of when that might occur into 2009,” Williamson says.

But most economists still believe we are unlikely to see a rate rise any time soon. St George Bank senior market strategist Besa Deda says, if anything, the higher-than-expected result will lock the RBA into a holding pattern on rates.

“They won’t be cutting rates with inflation pressures like this, but in terms of a hike it’s still unlikely we will see any lift next month – there is evidence of a slowdown and the RBA will be treading carefully to avoid a hard landing,” Deda says.

She says the result is likely to shift market expectations of a rate rise when the RBA next meets on Tuesday 6 May from 10% to around 20%.

Surging prices for food, up 2.1%, electricity, up 6%, rents, up 2%, and education, up 5.2%, were behind the strong inflation figure. A surprise 4% lift in health costs was a contributor to the higher than expected overall result.

On the markets today, the S&P/ASX200 is up 0.7% on yesterday’s close to 5606.3 at 12.15pm. ANZ Bank has had a good morning – its shares were up 2.2% to $21.641 at midday – despite reporting a 7% in first half profits to $1.96 billion.