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Economists hold CPI data up to the light

AAP logoAAP 28/10/2016 Garry Shilson-Josling, Economist

Inflation figures have given economists plenty to talk about as the Reserve Bank's next interest rate decision looms.

Expectations for a rate cut are low, with futures prices putting the chance of a cut on Melbourne Cup day at just four per cent, and just 10 per cent by Christmas.

That's despite figures on Tuesday showing the consumer price index (CPI) rose just 1.3 per cent over the year to June, with underlying measures averaging 1.5 per cent.

UBS economists Scott Haslem, George Tharenou and Jim Xu stuck by their research that had flagged underlying inflation's move below the RBA's two to three per cent target range this year, and now expect it to stay sub-target until early 2018.

"With the RBA's recent heightened focus on financial stability, and flagged patience in returning to the inflation target, we see our forecasts as consistent with the RBA remaining on hold until at least the end of 2017," they said.

That willingness to allow inflation to stray for an extended time was noted by most economists after the CPI figures.

"It's called 'flexible' inflation targeting for a reason," HSBC's Paul Bloxham said.

"Importantly, however, although inflation was below target, it was in line with the RBA's own set of forecasts (published in August), which had underlying inflation at 1.5 per cent in Q4."

What's more, recent indicators were consistent with "solid" economic growth, Mr Bloxham said.

ANZ senior economist Jo Masters said the figures showed inflation remained soft and weakness in prices widespread.

She expects the RBA to lower its inflation forecasts with its quarterly update in the Statement on Monetary Policy at the end of next week, and to stick with an "easing bias".

"That said, we think that the inflationary pressures are stabilising and that the RBA will remain on hold with the cash rate stuck at 1.5 per cent over our forecast period," Ms Masters said.

Nomura's Andrew Ticehurst summed up the view that low inflation allowed, but hardly demanded, a rate cut.

"In our opinion, the Q3 numbers were neither low enough to lead to a rate cut as soon as November, nor high enough to take a further rate cut off the table," he said.

St George Bank's Besa Deda was more willing to consider that the RBA might lower the cash rate on Melbourne Cup day.

"Persistently low inflation and further signs of slack in the labour market suggests a strong case exists for a further rate cut," she said.

She acknowledged that the latest CPI figures were not out of line with the RBA's August forecasts and that the latest figures might not be weak enough.

"With some hesitation, we continue to expect that the RBA will lower official interest rates by 25 basis points when it meets next week on Tuesday, but admit that it will be a very close call," Ms Deda said.

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