Inflation up, RBA waits, ASX rebounds, uncertainty reigns

Given that the RBA has already acknowledged that inflation will rise above 3% for some time during this year before easing, the volatility in stockmarkets and the uncertainty it is generating may allow the bank to leave the cash rate unchanged on February 5, reports Glenn Dyer.

Glenn Dyer

Jan 23, 2008

The December quarter and 2007 Consumer Price Index showed rises of 0.9% and 3.0% respectively, compared to an annual rate of 1.9% in the September quarter.

That normally would have been enough to convince the Reserve Bank to do nothing: it’s at the top of the 2%-3% annual target range for inflation. But the RBA’s version of the CPI, the Weighted Mean and Trimmed Mean indices, showed a worrying rise to an annual rate of 3.8% (3.1% in the September quarter) and 3.4% (2.9% in the September quarter).

Given that the RBA has already acknowledged that inflation will rise above 3% for some time during this year before easing, the volatility in stockmarkets and the uncertainty that has generated may allow the bank to leave the cash rate unchanged on February 5, but the scale of the rise above 3% on both of the bank’s measures is a concern.

Certainly the stockmarket, 90 minutes into a bullish rebound from the selling wave of Monday and Tuesday, took fright. Both the All Ords and the ASX/200 fell more than 1% — from just under 300 points up to just under 250 points ahead — in the 15 minutes after the inflation figures were released at 11.30am.

That clipped an exuberant rebound after Wall Street closed hesitantly lower by 128 points or 1%. The All Ords and ASX/200 charged ahead, up 3% in five minutes after the 10am start to trading and more than 300 points or 6% in the first half hour.

The Australian market looks almost certain to snap a 12-day losing streak, which had knocked off some $300 billion in value.

The US rate cut also put a floor under the Australian dollar which rallied to as high as 87.21 US cents overnight, a full two cents higher than yesterday’s low of 85.21 US cents.

Commodity prices were stronger, with copper up 2.2% in London and February gold futures added 1.1%, or $US9.60 to $US891.30 an ounce.

European markets welcomed the move with London’s FTSE 100 up 2.9%, having initially fallen 240 points or 4.3% at the start of Tuesday’s trading. Frankfurt’s Xetra Dax rose 0.1% and in Paris the CAC 40 was up 2.1% .