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Another big rate cut on the way as inflation pressures ease

By Colin Brinsden, Economics Correspondent
28 Jan 2009 5:04 PM

CANBERRA, Jan 28 AAP - Rapidly moderating inflation pressures have opened the gate for another substantial interest rate cut when the Reserve Bank of Australia holds its first board meeting of the year next Tuesday.

Financial markets are pricing in the risk of a further 100 basis point cut in the central bank's official cash rate as consumer prices posted their biggest quarterly drop in more than a decade.

The RBA cut the cash rate by 300 basis points over the last four months of 2008 in an attempt to stave off an ever threatening recession.

The consumer price index (CPI) fell for the first time in two years during the December quarter because of lower prices for petrol, cars, health products and financial services.

"Inflation is expected to continue to ease over the next six to 12 months, as the full effect of weaker world economic conditions flows through," Treasurer Wayne Swan told reporters in Canberra.

The consumer price index fell 0.3 per cent in the December quarter, the biggest drop since September 1997, Australian Bureau of Statistics data released on Wednesday showed.

The annual inflation rate fell to 3.7 per cent from 5.0 per cent in the 12 months to September, dragging it back towards the RBA's two to three per cent target band.

Underlying inflation - which smooths out volatile items such as petrol and food prices - also moderated, which Mr Swan suggested showed inflation pressures were easing more broadly.

"Inflation is definitely moderating, it is not the economic challenge in the short term. Supporting growth and jobs is," Mr Swan said.

He would not speculate on the outlook for interest rates, but opposition treasury spokeswoman Julie Bishop said retail banks must pass on reductions in full having so far failed to match recent cuts.

"Cuts in the official rates are designed to stimulate the economy, not to protect the balance sheets of banks and should be passed on to business and individuals to protect jobs and support consumer demand," she said in a statement.

Other new data showed a further deterioration in demand for workers, while an indicator of future economic growth pointed to an increased threat of a recession in 2009.

Vacancies for skilled workers slumped a further 7.7 per cent in January and now stand 43 per cent lower than a year earlier.

The Westpac-Melbourne Institute index of economic activity, which indicates the likely pace of growth in three to nine months' time, also contracted by 2.2 per cent in November.

"This sharp fall in the growth rate of the leading index, coupled with the further deterioration in the global growth environment since our last report, intensifies the risks that the Australian economy will contract through 2009," Westpac chief economist Bill Evans said.

Recession worries will continue to put pressure on the government to introduce another stimulus package.

There were mixed reports on Wednesday on the impact of last year's $10.4 billion stimulus package.

Retail giant Woolworths said the package helped lift its sales in the first half of the 2008-09 financial year by 8.8 per cent.

"There is no doubt that the government fiscal stimulus was a positive for us," Woolworths chief executive Michael Luscombe told a teleconference.

In sharp contrast, the Strathfield Group has been placed in voluntary administration.

The car audio, home entertainment and mobile phone retailer, which has around 100 outlets nationally, said the move was forced by less than satisfactory Christmas and post-Christmas trading results and the worsening outlook for the retail sector.