FXstreet.com (Barcelona) - According to the NAB Analyst Team, “We expect the December quarter CPI release (due 23 January) to confirm that inflationary pressures remained moderate in the final months of 2012. Moreover, we posit a core inflation rate of 0.7% (2.4% through the year; including the impact of carbon), which is unchanged from the September quarter outcome and well within the RBA’s comfortable range.”

Headline CPI inflation is expected to be softer however, at 0.4% (2.4% through the year), largely reflecting weakness in fruit & vegetable prices – petrol will be relatively neutral. “The continued strength of the Australian dollar together with a weakening economy and price discounting means that near term inflation remains moderate, consistent with those forces NAB business survey data also show subdued price pressures at end 2012.” the team adds.

While a February rate cut will be discussed at the next board meeting, they already have done a lot. A low core CPI would probably be needed. “We see the tipping point at 0.6% or lower (or 0.5% ex carbon). Hence we still see a March cut as more likely but it will be a close run thing.” they note.

Looking further ahead, the weaker activity outlook for the domestic economy is expected to help contain inflation to below 3%, even when the impact of carbon pricing is taken into account. That will allow the RBA to focus more on cutting to help non-mining sectors of the economy. With the unemployment rate expected to rise to near 53⁄4% by mid year, we still see the need for three 25 bps cuts, which we have tentatively penciled in for March, May and August.