A rate cut in February?

Private gauge of inflation at lower end of RBA's target range

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published January 14, 2013 11:03 am AEDT

Not likely, suggests a private gauge of inflation.

According to TD Securities – Melbourne Institute, their measure of inflation shows that consumer prices are tracking in the bottom half of the central bank's target range, increasing the scope for the RBA to cut rates if necessary.

Over the 12 months to December, the indicator rose 2.4%, close to the mid-point of the RBA's target band of between 2-3%. TD Securities economist Annette Beacher said that underlying inflation is expected to remain at these levels this year.

Ms Beacher's view was that the RBA would likely leave rates on hold in February, with previous rate cuts already providing a significant boost to Australia's economy. Since November 2011, the RBA has cut rates by 1.75% to 3%, although Australia's big banks have been reluctant to pass on the full amount to customers.

Commonwealth Bank (ASX: CBA) has warned that market volatility in the US may delay its ability to lower interest rates for its home loan customers, despite managing to obtain cheaper funds just last week. According to the Australian Financial Review, Group Treasurer, Lyn Cobley said that it was too early to judge whether better funding conditions would continue, given long-term problems in Europe still exist, and the possibility that cheaper funding was a result of markets being more optimistic in January.

Australian banks have blamed high wholesale funding costs and high deposit interest rates as the reason for not passing on the full cut in official cash rates to customers. In December 2012, ANZ Bank (ASX: ANZ), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and the Commonwealth Bank passed on just 0.2% of the 0.25% cut to mortgage borrowers.

Foolish bottom line

It seems the banks are taking a conservative view, and a 'watch and see' brief over the fall in wholesale funding costs. Home-loan customers will be hoping this is a long term trend, in which case they could see lower interest rates in 2013. Whether the RBA helps them out by further lowering official cash rates, remains to be seen.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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