The Reserve Bank is likely to slash the cash rate back to 4% in February as a result of benign inflation figures heading into 2012.
TD Securities head of Asia Pacific research, Annette Beacher, said that 'contained' inflation in the final months of 2011 and the global market would force a cash rate reduction.
“Inflation tumbled over the course of 2011, paving the way for the RBA to shift monetary policy back to a neutral setting in the final months," Beacher said.
"As we anticipate many more months of global financial market ructions due to the unravelling European debt crisis, as well as underlying inflation dipping beneath the bottom of the RBA’s target band, we expect a 25 basis point reduction in the cash rate to 4 per cent at the 7 February RBA Board meeting."
Beacher said should the board choose to hold the cash rate steady in February, the rate would still move some time by mid year to 3.5%.
The TD Securities- Melbourne Institute Inflation Gauge rose 0.5% in December, following a 0.1% rise in November, a total rise of 2.4% in the twelve months to December.