After three months of waffling without adding much to the sum of human knowledge, monetary policy commentators finally have something to go on with tomorrow: the December quarter CPI, which is the main course for the Reserve Bank’s board meeting next Tuesday.

And the CPI will provide a great headline with the plunging banana price and falling fuel costs resulting in a number that might be as low as 0.2%. An optimist could annualise that and say Australia’s inflation rate is less than one per cent.

Too bad the RBA discounts bananas and petrol and takes no notice of the headline figure. While the blokes in pyjamas copped plenty of bad press when they were luxury items, they really weren’t to blame for the interest rate rises as the RBA’s underlying inflation measures strip out the most volatile contributions both on the up and down sides.

Which will leave next week’s interest rate call a close one. Macquarie Bank’s Rory Robertson is betting the RBA will break its 2006 pattern by keeping its power dry next week with the option of a hike in March or April, depending on what happens with the labor market, housing credit and commodity prices. Robertson is telling clients:

Any widespread, sustained downswing in commodity prices would tend to push our economy towards a painful period of sub-par growth. Whether the current pull-back in global commodity prices will intensify from here, or disappear, remains anyone’s guess. The RBA will be watching developments on this front very closely in coming quarters.

In summary, if the “trimmed mean” CPI rises by 0.7% or less (as I’m guessing it will), I’ll expect the RBA to remain on-hold, taking a “wait and see” approach into March and perhaps beyond. By contrast, if the “trimmed mean” prints at 0.9% for Q4, I’ll of course have to fold my tent and join the rate-hike camp.

We find out at 11.30 in the morning.

Peter Fray

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