INFLATIONARY pressures that have loomed ominously over the economy are easing, according to new research, giving the Reserve Bank crucial breathing space to assess the impact of the global slowdown.
Analysts say the central bank is today likely to soften its rhetoric on the sharply polarised character of the economy in the wake of fresh evidence that core inflation is slowing.
Analysts believe the Reserve will keep the official interest rate on hold today at 4.75 per cent.
But, amid speculation that Australia is in the middle of a protracted rates freeze, they say the central bank's board is likely to give itself more "wriggle room" to act aggressively if the debt crisis spills across the world.
CommSec chief economist Craig James said it was time for the RBA to change from a position that assumed economic activity would lift along with inflation.
"The latest data shows that manufacturing continues to contract while inflationary pressures are easing, not growing," Mr James said. "In fact, apart from mining, the Australian economy more broadly continues to struggle. Housing activity is at decade lows and consumer spending is stagnant."
He said that while the RBA was unlikely to adopt an "easing bias", investors should look for "more dovish language" in the statement that would accompany today's decision.
"Interest rates clearly won't be rising any time soon. The main interest is whether the Reserve Bank softens its upbeat rhetoric on the economy in its monetary policy decision tomorrow," Mr James said.
His comments follow the release of TD Securities-Melbourne Institute monthly inflation gauge, showing core inflation was at a seven-year low in September.
Excluding volatile items such as petrol and fruit, prices were up just 1.2 per cent on a year ago. "It doesn't matter which way you cut the data, inflation is under control," he said.
According to 15 economists surveyed by AAP, the central bank will keep the cash rate at 4.75 per cent.
Westpac is maintaining its position - first articulated in July - that a rate cut is necessary before Christmas.
The bank's senior economist Matthew Hassan said a number of rate cuts would be needed to stimulate growth in the face of a weaker domestic economy coupled with deteriorating conditions abroad.
Nomura chief economist Stephen Roberts said he expected a single rate hike by the RBA in February next year as Europe's crisis settled and Australia powered ahead on the back of further strong growth in China.
"Providing that happens for the US and Europe then there's not too much to worry about with Asian growth," Mr Hassan said.
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