Australia’s Inflation Accelerates, Easing Pressure for Rate Cuts

(Bloomberg) -- Australia’s headline inflation accelerated last quarter, sending the currency up half a U.S. cent and prompting money markets to pare bets on an interest-rate cut.

Key Points

• Quarterly headline CPI increased 0.7%, exceeding the 0.5% median estimate in a survey of economists

• Trimmed mean CPI rose 0.4%, matching forecasts

• Annual headline CPI advanced 1.3%, beating a predicted 1.1% gain

• Annual trimmed mean CPI rose 1.7%, matching estimates

• Aussie dollar bought 76.88 U.S. cents at 12:40 p.m. in Sydney from 76.42 cents prior to report; it earlier jumped as high as 77.09 cents

• Traders now see just over 5% chance of a rate cut Tuesday and less than 30% probability over coming year

Big Picture

While annual inflation remains below the lower end of the Reserve Bank of Australia’s target range, new Governor Philip Lowe has signaled a willingness to tolerate weaker price growth given economic growth and unemployment remain solid. Instead, he’s stressed the risks of asset prices ballooning from a record-low 1.5 percent benchmark cash rate. As a result, policy makers are unlikely to repeat the cuts made following the previous two CPI reports.

Economist Takeaways

“The risk of a surprise November rate cut from the RBA has diminished,” said James McIntyre, head of economic research at Macquarie Bank who’s been skeptical about the economy’s strength. “Other key forecast variables, such as the exchange rate, oil prices, the unemployment rate, and recent GDP growth do not, in our view, suggest enough downside pressure on the RBA’s prospective November forecast revision to compel a rate cut.”

“Inflation has lifted from the canvas, albeit with a lot of help from higher prices for fruit and vegetables,” said Craig James, senior economist at the securities unit of Commonwealth Bank of Australia. “Still, the higher headline rate of inflation will serve to lift key measures of inflation expectations and thus make it more likely that inflation will return to the 2-3 percent target band in coming quarters.”

Other Details

• Quarterly weighted median CPI gained 0.3% compared with a forecast 0.4%

• Annual weighted median CPI climbed 1.3% vs. forecast 1.4% increase

• Tradable goods prices, which are impacted by the currency and other international factors, rose 0.7% from a year earlier

• Non-tradables, which are affected by domestic variables like utilities prices, advanced 1.7%

• Fruit prices jumped 19.5% from prior quarter and the cost of vegetables by 5.9%

• Electricity prices gained 5.4% and property rates and charges by 4%

• Automotive fuel fell 2.9% and telecommunication equipment and services declined by 2.5%

• The Aussie has risen almost 12% since mid-January and traditionally tracks the trajectory of commodity prices: iron ore, Australia’s biggest export, has climbed more than 50 percent in that period; coal, the second-biggest earner, has almost doubled this year
  
  
  

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net. To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Victoria Batchelor

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