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Inflation eases down under

Catherine Deshayes

When interest rates were cut in Australia last week for the first time in seven years, second home owners breathed a sigh of relief, and now the Reserve Bank has tipped inflationary pressure to soon start easing.

More than 250,000 Britons emigrated abroad last year, and one in three moved down under, making property sought after by international investors.

Now, the cost of borrowing in Australia to purchase property is set to fall as a result of the cuts, which saw the official cash rate lowered by 0.25 per cent to seven per cent by the Reserve Bank of Australia.

Now, the Reserve Bank has said that they expect inflationary pressures to soon start falling.

The global credit squeeze, high oil prices and a troubled housing market were some of the factors that had driven the decision to lower interest rates, Glenn Stevens, the Reserve Bank of Australia's (RBA) Governor, said.

"Financial conditions had been quite tight, following rate rises earlier this year," said Mr Stevens.

Over the past seven years, the central bank has instituted rate increases on a dozen occasions to bring down high inflation, which had been fuelled by demand from India and China for Australian iron ore and coal.

Mr Stevens told the House of Representatives Economics Committee that the central bank was probably six months away from seeing clear evidence that price pressures in the economy were beginning to ease.

"Annualised inflation, which is currently around 4.3 per cent and forecast to peak at five per cent this quarter, had to fall some distance before it came back within the RBA's preferred two to three per cent target band.

"A somewhat larger fall in inflation overall is required on this occasion than was the case in either 2001 or 1995.

"Rather than trying to achieve that larger fall in inflation by pushing it down more quickly, the board's strategy is to seek a gradual fall, but over a longer period," Mr Stevens added.  

Mr Stevens also said that the prospect for a moderation in inflation were evident in slowing domestic demand, particularly among households.

Mr Stevens noted that financial markets are already pricing in a potential rate cuts in the months ahead, with many economists expecting another cut next month.

But the RBA cautioned it would continue to assess the situation on a month-to-month basis.

Mr Stevens said the RBA was trying to reduce domestic demand and prices, without stalling the economy.

He added said that a recession in Australia was unlikely, noting that the RBA had maintained its forecasts for economic growth published in its August statement on monetary policy.

"Is there a zero risk of recession? No, it's not zero, but the most likely one is the one in the published outlook," Mr Stevens said.

Kevin Rudd, the Australian Prime Minister, welcomed the rate cut and said this would be the first experienced by 740,000 first-time home buyers.

"However, interest rates took a long time to rise and will take a long time to come down," Mr Rudd said.

To browse property for sale in Australia, visit australia.themovechannel.com/

Picture by LaurenG