RBA interest rate watch: Inflation up 0.2% in December quarter, below expectations

Headline inflation rose just 0.2 % in the December quarter to an annual rate of 2.2% for 2012, according to ABS data released today.

This was below expectations of a 0.5% rise in headline inflation over the quarter to an annualised rate of 2.5%, according to an AAP survey of 15 economists.

Core or underlying inflation, watched most closely by the RBA, rose by a lower than expected 0.5% over the quarter to an annualised rate of 2.2%.

This is at the bottom end of the RBA's target inflation band of 2% to 3% and the lower than expected core reading will weigh into discussions about a possible rate cut in February.

However, CommSec economist Craig James says strong house price growth over January (up 1.3% over the first three weeks of the year) is likely to stay the RBA's hand in February.

"The latest data keeps the door open to a rate cut should it become necessary," says James.

"Financial markets see a 36% chance of a rate cut. CommSec believes that the Reserve Bank will leave interest rates unchanged in February.

James says the December quarter data indicates that "inflation is not an issue at present, meaning that rates can stay lower for longer".

"Inflation is well and truly contained and the Reserve Bank certainly has the scope to cut interest rates interest rates in February if it believes it is necessary. The low inflation result removes any lasting hurdle for the Reserve Bank to cut interest rates over the next few months," he says.

The Aussie dollar was unchanged at US105.55 cents.

The ABS figures show that the housing group rose 4.4% in the December quarter with rises in all categories.The main contributors to the rise were rents (+0.8%), maintenance and repair of the dwelling (+0.5%) and new dwelling purchase by owner-occupiers (+0.1%).

The most significant price rises in the December quarter 2012 were for domestic holiday travel and accommodation (+6.2%) and automotive fuel (+2.6%).

The most significant offsetting price falls were for vegetables (–5.7%), audio, visual and computing equipment (–4.3%) and pharmaceutical products (–3.5%).

NAB and ANZ had forecast a core inflation reading of around 0.7% for the quarter equating to an annualised rate of 2.4% to 2.5%.

According to NAB, a low core reading of 0.6% or below for the quarter is needed to sway the RBA to cut the cash rate in February rather than March.