THE Reserve Bank has room to cut interest rates further this year if needed to combat signs of renewed economic weakness after official figures showed price pressures easing for consumers.
However, most economists and market watchers expect the Reserve will hold fire at its first meeting of the year on February 5, preferring to wait and see the impact of 1.75 percentage points of cuts delivered over the past year and a half.
An official inflation report released by the Bureau of Statistics yesterday found the cost of the average basket of goods and services bought by Australian households climbed just 0.2 per cent in the final three months of December, and 2.2 per cent over the year.
This was a sharp deceleration in price pressures from the 1.4 per cent rise recorded in the three months following the introduction of the carbon tax.
Falling prices for vegetables, computers, TVs and pharmaceuticals were behind the tamer than expected inflation report.
The cost of electricity rose 17.7 per cent last year, but actually fell 0.1 per cent in the final three months as the impact of the carbon tax subsided.
Fruit prices tumbled 19 per cent last year and lamb prices fell 12.4 per cent.
However, the cost of some essential services rose, with childcare up 8.6 per cnet, medical services up 9.4 per cent and secondary school costs up 7.7 per cent.
Despite the overall weakening in price pressures, an economist at Barclays, Kieran Davies, said the Reserve Bank was likely to sit tight at its February meeting.
"The world economy has improved slightly, while recent domestic data show that earlier rate cuts are starting to have an impact on asset prices, consumer confidence and the housing market."
But the chief economist at JP Morgan, Stephen Walters, expects the cooling jobs market - suffering the effects of a high exchange rate - would prompt the Reserve to cut interest rates again this year, if not next month then soon.
"We believe officials still have lingering doubts over what will fill the "growth gap" once mining investment peaks later this year, so have been biased towards supporting growth in the non-mining economy."
Meanwhile, the global economic recovery is set to be even slower than expected in the year ahead, as the world's leading forecaster dampens its outlook.
The International Monetary Fund said global growth should reach 3.5 per cent in 2013, slightly below its October forecast of a modest 3.6 per cent growth for the year.
The IMF said factors that have weighed on global activity were easing, but at a slower rate than predicted.
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