Soft Australian inflation sets scene for rate cut

Australia said Tuesday inflation rose a weaker-than-expected 0.1 percent in the March quarter, fuelling speculation the central bank will cut interest rates next week.

The Consumer Price Index had been expected to rise 0.6 percent for the quarter and analysts said the weaker figure essentially locked in a stimulatory rate cut when the Reserve Bank of Australia (RBA) meets on May 1.

The Australian Bureau of Statistics figures showed the CPI climbed 1.6 percent through the year to the March quarter, well down on the 3.1 percent rise recorded through the year to December.

Treasurer Wayne Swan said the ongoing recovery from last year's natural disasters -- epic floods and Cyclone Yasi which hit coal mines and destroyed crops -- meant the price of fruit had dropped by 30 percent over the quarter.

"These are very much welcome figures," Swan told reporters. "But we do know that many households are doing it tough."

Swan, who will hand down the national budget on May 8, denied that the data was an indication growth was weakening in the economy dubbed the "Wonder from Down Under" after it escaped recession during the global crisis.

"Contained inflation is a reminder of our strong economic fundamentals that have put the Australian economy in a league of its own," Swan told reporters in Canberra.

"What we have here is solid growth, low unemployment, strong public finances, a huge investment pipeline plus contained inflation and that does create room, and has created room, for interest rates cuts last year."

Analysts said the data, which saw the Australian dollar drop almost half a cent on the news, left the RBA open to cut rates at its next meeting.

The bank, which last eased rates in late 2011, kept them on hold at 4.25 percent this month but indicated it would be prepared to announce a cut if inflation weakened.

"Really there is no sign at all of the inflation bogeyman," Westpac senior currency strategist Sean Callow told Dow Jones Newswires.

Economist Shane Oliver from AMP Capital said the underlying inflation rate of 2.2 percent -- at the lower end of the central bank's 2.0 to 3.0 percent comfort zone -- had cleared the way for an interest rate cut.

Given global uncertainty, the softness in the economy, borrower caution and a benign inflation outlook, interest rates should fall by 75-100 basis points over the next six months, he said.

While there was no doubting the strength of the mining investment boom, it was not delivering anything like the trickle down boost to the economy seen in earlier booms, added Oliver.

"At the same time the non-mining economy is suffering under the impact of the strong Australian dollar and relatively high bank lending rates," he said.

"The result is parts of the economy are in recession and overall GDP growth is sub-par."

The data comes as a new report warned the gap between Australia's turbo-powered mining sector and the rest of the economy was widening.

"Australia has a two-speed economy," Deloitte Access Economics said, noting that families were saving rather than spending, retail and housing construction were underperforming and government spending was weakening despite the mining boom.

"The two-speed split in Australia's economy, which was already large, is getting larger still," it said.

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