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Central bank begins another balancing act -

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ELEANOR HALL: While some politicians are calling on the Reserve Bank to make deep cuts to interest
rates tomorrow, the Reserve Bank may end up being constrained by the need to keep inflation in

A survey released late this morning shows that inflation is coming off its peak.

But a closer look at the numbers suggests that the RBA may not be able to cut rates as much as many
in Canberra and the market now expect.

With more, I'm joined in the studio by Richard Lindell.

So Richard, what does the TD Securities inflation gauge tell us about where prices are going?

RICHARD LINDELL: Eleanor, according to this survey, prices rose 0.1 per cent in August and 4.2 per
cent over the year. On the face of it - that's pretty good. Inflation appears to be coming off its
peak of 4.8 per cent hit in June.

But much of the fall is due to lower petrol prices. In fact, if you strip out petrol - inflation
would have risen by 0.6 per cent. Fruit and vegetables, insurance and gas prices all rose
significantly last month. So this means there are still plenty of inflationary pressures in the

The author of the inflation report is Josh Williamson at TD Securities and he says the RBA will cut
by a quarter of a per cent tomorrow, but is unlikely to cut as deeply and quickly as it has in
previous cycles.

JOSH WILLIAMSON: I think that we are going to see a slow and a steady pace of interest rate cuts
over this cycle. Probably massing over probably 125 basis points. That is different to the 200, 250
basis points we have seen in the last couple of cycles but primarily due to the fact that, again we
have a Reserve Bank that is concerned about inflation.

Inflation pressures are likely to remain above the target band for a good 18 months to come yet. So
the Reserve Bank will want to manage the downturn in the economy but not restimulate the upswing
and risk restimulating inflationary pressure.

ELEANOR HALL: That is Josh Williamson from TD Securities.

Richard, this isn't what the Reserve Bank has been saying in its reports lately but the other part
of the equation here is the strength or otherwise of the economy. And it seems each new piece of
data contradicts the previous one. Where is the economy heading today?

RICHARD LINDELL: Well, I think you are right Eleanor and no one really knows the answer to that
one. This morning we saw the release of the balance of payments figures also - the deficit came in
at just under $13-billion which is down from 20-billion in the first quarter. It's still a terrible
number though given the mining boom.

But it is moving in the right direction and it does show the huge improvement in the prices we're
receiving for coal, for iron-ore and for other commodities overseas.

So these numbers do highlight the boost we're getting from the mining boom and also show why
business investment is still holding up.

But on the downside, last week we saw a big fall in construction activity which makes up about 15
per cent of the economy. Retail sales remain weak. Business and consumer confidence are both at
recession levels still. But for Josh Williamson at TD Securities on balance he says the talk of
economic gloom has been overdone.

JOSH WILLIAMSON: This just shows you the stimulatory effect of the terms of trade and the fact that
we are starting to get some traction in our exports now after all that business investment has gone

This is important because what it is going to mean is that we could actually have exports actually
adding to economic growth for the first time in a couple of years and this is also going to help
buoy overall economic conditions and factor into the RBA decision making. So we are certainly not
in the recessionary-like conditions of the New Zealand or the US.

The economy is slowing but we are seeing a re-balancing of the economy towards business investment,
towards exports and away from the household sector. So we are actually in a pretty good position
and probably the envy of many other countries in the industrialised world.

ELEANOR HALL: That is Josh Williamson from TB Securities again.

So Richard on Wednesday there is the release of the June quarter economic growth numbers. That will
tell us more about how the economy is travelling. What can we expect from them?

RICHARD LINDELL: Well it certainly will although they are historical numbers, it has got to be

The market forecast seems to be that the economy will have grown by 0.4 per cent in the three
months to June. So, it's still a pretty healthy number although not quite as high as we've become
used to in recent years.

It also shows that the economy has managed to stand up to very high official interest rates as well
as those few more thrown in for good measure from the banks.

So, the RBA may have hoped for a slightly lower number on GDP, but overall if the number come in as
expected, it may actually provide the RBA with some more flexibility in that it won't need to move
too quickly to cut rates and it can maintain the focus on inflation which has got to be remembered
is still not expected to peak until the end of this year at a very uncomfortable 5 per cent.

ELEANOR HALL: Richard Lindell, thank you.