Way now clear for rate cut

A cut in interest rates in February is almost certain after a surprise inflation result for the December quarter showing the Consumer Price Index rising just 0.3 per cent.

This puts the annual rate of inflation at 5.8 per cent for 2000, much of which can be attributed to the one-off spike to prices following the introduction of the GST which saw the CPI rise 3.7 per cent in the September quarter alone.

Discounting for the GST component in inflation – the exact magnitude of which has not been accurately measured – it appears ongoing underlying inflation in the economy is running at somewhere around 2.5 per cent, nicely within the Reserve Bank's target band of 2 to 3 per cent.

This inflation target is the key determinant in the RBA's setting of official interest rates and after signs last year that a combination of the GST, the low Australian dollar and higher oil prices might see a blowout in inflation, today's result is the strongest evidence yet that we have beaten that threat.

With other indicators pointing to a slowing domestic economy and a downturn in the US this year, the RBA has all it needs to justify an initial 0.25 percentage-point cut in rates when it meets on February 6, the beginning of the downward section of the rate cycle which may see a further quarter-point cut in March or April. Each such cut would amount to a $20 reduction in repayments on a $100,000, 25-year loan. A cut of 0.5 percentage points in one go would seem too much at this stage.

The real danger from here on is that we talk ourselves into recession. The growing body of survey evidence portraying extremely pessimistic business confidence – today's NAB and Dun & Bradstreet surveys being the latest examples – threatens to become a self-fulfilling prophecy.

The various economic indicators for November-December show an economy slowing but not spiralling into decline. Yet if the outlook expressed by many business owners is converted into concrete decisions then recession conditions are what we may well end up with.