The Reserve Bank of Australia (RBA) on Tuesday signaled again that official inflation data could trigger a cut in interest rates.
In an address to an investment conference in Sydney, RBA Deputy Governor Ric Battellino said the consumer price index (CPI) data for the September quarter due out on Wednesday would provide further information on whether to ease monetary policy.
He said that with domestic inflation cooling and world economies looking increasingly unstable, there may be scope to lower the cash rate.
"Inflationary pressures ... appeared to pick up noticeably in the first half of 2011 and the prospects were that inflation would rise to above the target range of two to three percent over the next couple of years," Battellino said.
"The downward revisions to recent estimates of underlying inflation and the softer global economic outlook have made the outlook for inflation less concerning, providing scope for monetary policy to be supportive of economic activity, if needed," he said.
Australia's economy could be further affected by global uncertainties and financial market volatility, Battellino said.
"The situation in Europe is particularly disturbing since the authorities need to agree on policies that deal simultaneously with excessive government debt, weak banking systems, soft economic activity and sharp differences in competitiveness among European countries," Battellino said.
"It remains to be seen how the Australian economy will respond to the recent financial volatility and the consequent fall in confidence and the loss of wealth."
Overall, Battelino said that while the global economic situation remained fragile, Australia was relatively safe.
Most economists believe inflation for the September quarter will be noticeably lower, while some market watchers have been expecting inflation to stay high, which makes an imminent cash rate cut unlikely.
The Reserve Bank will need to see underlying inflation at or below 0.6 percent on the quarter or 2.6 percent year-on-year.
The RBA uses the cash rate as a tool for keeping the annual rate of headline inflation between two and three percent on average over the course of an economic cycle.
It has kept the cash rate unchanged at 4.75 percent since November 2010.
The RBA will make its decision on interest rates at the next board meeting on Nov. 1.