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Inflation surge likely to temper rate cuts -

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ELEANOR HALL: Well despite the warnings from the Treasurer, economists are now revising down their
expectations of an interest rate cut tomorrow as new evidence points to rising inflation.

A monthly inflation gauge by TD Securities and the Melbourne Institute rose again last month after
an earlier surge in January.

It now has annual inflation running at 3.1 per cent, that's just above the Reserve Bank's (RBA)
target range.

And while this doesn't necessarily mean that the inflation genie is out of the bottle again, some
economists say the surge will force the RBA to keep rates on hold tomorrow.

TD Securities senior strategist Josh Williamson spoke to our business editor Peter Ryan.

JOSH WILLIAMSON: One of the main drivers we've seen this month, as we have seen over the last 12
months, has been petrol. Petrol prices are very volatile; they have had a significant impact on the
overall headline result.

But what we are seeing though is the Net Balance Statistic, that is the statistic that records the
number of price rises over price falls, still remains elevated and that tells us that inflation in
a broad sense is not falling or decelerating by as much as we initially thought it would and
there's a little bit of resilience left there in prices.

PETER RYAN: Given that this is the biggest back to back increase in the inflation gauge, is it fair
to say the inflation genie is crawling out of the bottle?

JOSH WILLIAMSON: No I don't think the inflation genie is out of the bottle, but we're having a
little more problems squeezing him back in.

PETER RYAN: So how worried should the Reserve Bank be about where inflation is heading?

JOSH WILLIAMSON: Well I think given the fact about what we know about what's happening in the
global economy and the fact that the Australian economy is slowing quite markedly, they shouldn't
be too concerned about an inflation, but it's the pace of inflation or the pace of disinflation
that may be a little bit concerning.

But the fact is, there are some residual price pressures there and we think what this is going to
mean for the Reserve Bank is that they're more likely to keep interest rates we think on hold when
they actually meet tomorrow, rather than continue those aggressive easings or cuttings that we've
seen over the last five months.

PETER RYAN: So we've seen the Reserve Bank really have the inflation fear on the backburner because
of the global economic crisis but it could be edging its way back to the top of the agenda?

JOSH WILLIAMSON: Well that's right, global considerations have been paramount because we do have a
recession in most industrialised economies around the world, we've got a global financial crisis as
well, but we think the lags or the time taken for those impacts to affect the Australian economy
has taken longer than a lot of analysts actually have expected and I think this is showing up in
the inflation data that we're seeing.

I don't think it's a question of us seeing lower inflation and indeed much weaker economic growth,
it's just that the time taken for that to occur is taking longer than expected and I think that's
showing up in the inflation readings we're seeing today.

PETER RYAN: Given your prediction that the Reserve Bank will stay on the sidelines tomorrow, do you
still think though that there will be further deeper cuts later in the year?

JOSH WILLIAMSON: I think there will be further cuts, I don't think they'll be deeper cuts, I think
what the Reserve Bank will do is actually reduce the magnitude of each cut, so say between 25 to 50
basis points rather than 75 to 100 that we've gotten used to over the last couple of months, but
they will still need to cut rates further.

The Australian economy, if it's not there already, will be entering a recession probably in the
first half of 2009 and that will require further cuts in order to sort of mitigate or minimise the
worst of that.

PETER RYAN: So keeping their powder dry?

JOSH WILLIAMSON: Correct.

PETER RYAN: The Treasurer Wayne Swan has warned this morning that growth in the last quarter of
2008 was seriously affected by the global downturn. Do you think those comments could influence the
Reserve Bank's thinking on interest rates when they sit down tomorrow?

JOSH WILLIAMSON: The Reserve Bank has been relatively more optimistic on Australia's economic
performance and their expected economic performance this year than many other analyst and
indicators would suggest, so I don't think what Wayne Swan has said would influence the Reserve
Bank.

ELEANOR HALL: That's TD Securities senior strategist Josh Williamson speaking to business editor
Peter Ryan.