Analysts said on Tuesday that chance are higher that the Reserve Bank of Australia (RBA) will cut the overnight cash rate based on result of the Producer Price Index (PPI), not so much on the European sovereign debt crisis.

The PPI, considering a leading indicator of the consumer price index (CPI), was at 0.3 per cent for the quarter. It was just below analysts' expectation. The CPI data is scheduled for release on Wednesday.

Justin Smirk, senior economist of Westpac, told Australian Broker News that the PPI release is an indicator that inflation risks are weighted to the downside.

"Today's PPI release has left us more confident that an upside surprise to our forecasts are unlikely and that a downside surprise is the more likely outcome," he said.

Analysts are in agreement that the RBA would likely cut the key lending rate to 4 per cent from the current 4.25 per cent. The only remaining question would be the reason behind a cut on interest rates, likely to be announced after the RBA Monetary Policy Committee's Feb 7 meeting.

That meeting would be one of four, out of the 11 held yearly, that would be made after the release of the quarterly CPI figure.

More than the European debt crisis, analysts cited the weakening Australian economy which would lead to a likely RBA rate cut.

These economic indicators include the worsening unemployment rate, low levels of investment by private businesses outside the mining sector, slower growth in credit for housing, cyclical lows on residential and non-residential sectors and strong Australian currency

Analysts said that the strong Australian dollar had placed a lid on some price pressure which suggests that inflation is well contained and would pave the way for another round of key lending rate cut by the Australian central bank.

"To the extent that you get a lower (CPI)... It probably means that you're definitely going to get one (cut in interest rates) in February and you may get another (cut) later one," National Australia Bank group chief economist Alan Oster told The Sydney Morning Herald.

Traders said there is an 80 per cent chance that the RBA will reduce the overnight cash rate by 25 basis points.

However, the Australian Financial Review cited a Morgan Stanley analysis that while Australian banks would re-price home loans to offset higher funding costs, it would pass on only a part of any RBA key lending rate cuts.

The ANZ Bank had officially declared independence from the RBA rate cuts by announcing interest rate changes every second Friday of the month, while the three other large banks which were pressured to pass in full the last RBA interest rate cuts indicated it will not succumb to the pressure next time.

The good news for Australian consumers is that three major Japanese banks are eyeing a 5 to 10 per cent share in the country's home market loan. These are the Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and the Mizuho Financial Group.

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