Falling inflation may lead to rate cut

The inflation rate slowed to 3.0 per cent last month, suggesting that the rising trend in consumer prices evident in recent months has peaked. It also clears the way for the Central Bank to start cutting interest rates.

Figures published by the Central Statistics Office (CSO) showed that consumer prices rose by 0.3 per cent in September and increased by 3 per cent year-onyear, compared to an annual rise of 3.2 per cent in August.

Meanwhile, trade figures for June show that the economic boom continues unabated. The Republic's external trade surplus rose to a record £1.7 billion as exports surged by 16 per cent to £4.3 billion, while provisional figures point to a surplus of £1.3 billion in July.

The inflation data were in line with expectations and many analysts now believe that inflation has peaked and should begin to moderate in coming months.

"The figures confirm that Ireland cannot be an `oasis' of inflation in a world economy on the brink of deflation. Indeed, the outlook for Irish inflation in the next 12 months is extremely good," says Mr Austin Hughes, economist at Irish Intercontinental Bank (IIB), who is forecasting 2 per cent inflation next year.

The consumer price figures provide a more favourable backdrop for the Central Bank to start cutting interest rates to the levels prevailing across the rest of the euro zone, possibly as early as today or Monday.

The European Central Bank (ECB) council meets on Tuesday and interest rate convergence is expected to be discussed at the meeting. In light of growing pressure from our prospective single currency partners, the Central Bank may be keen to have started the process of reducing interest rates before the meeting.

The recent recovery by the pound against sterling should also help to reassure the Bank about the inflation outlook, as it will help to hold down import prices. The pound is currently trading some 12 per cent above its lows against sterling.

"The Central Bank may now be more confident that inflation is heading down, particularly given the pound's appreciation," says Dr Dan McLaughlin, economist at ABN-Amro. "Consequently, a rate cut this month is now highly likely, possibly as early as today or on Monday via the repo rate which may fall from 6.19 per cent to 5.5 per cent." The Central Bank discloses the weekly repo rate, or the rate at which it supplies funds to the wholesale money markets, each Monday morning.

A 2.2 per cent increase in the price of clothing and footwear, due to the conclusion of the summer sales, and a 1.2 per cent rise in the cost of services were the biggest factors behind the rise in the consumer price index last month.

However, the price of food fell by 0.4 per cent, mainly due to decreases in the price of beef, fresh vegetables, potatoes and fresh fruit prices.

On an EU harmonised basis, prices rose by 0.3 per cent in the month and increased by 2.8 per cent in the 12 months since last September but this still leaves Ireland with one of the highest inflation rates in the EU.