Australian Inflation Probably Quickened, Stoking Rates Threat to Gillard

Australia’s annual inflation rate probably accelerated above the top of the central bank’s target range last quarter, increasing pressure on policy makers to boost borrowing costs during a federal election campaign.

The consumer price index rose 1 percent in the quarter for an annual gain of 3.4 percent, according to the median estimate of 21 economists surveyed by Bloomberg News. The Bureau of Statistics releases the figures at 11:30 a.m. in Sydney tomorrow, six days before Governor Glenn Stevens and his board review borrowing costs.

Reserve Bank of Australia policy makers signaled last week they are monitoring inflation as they determine whether to resume the most aggressive round of interest-rate increases by a Group of 20 member. Price pressures show signs of mounting as Chinese demand for natural resources stokes a mining boom that has pushed Australia’s unemployment to half the level of the U.S. and Europe.

“A core reading of 0.9 percent quarter-on-quarter or more would suggest that inflationary pressures are building much faster than anticipated,” said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. in Sydney. “That would undoubtedly prompt a material change in the medium-term outlook for inflation, thereby prompting the RBA to raise rates in August.”

Election Campaign

Speculation increased last week that Governor Stevens will resume raising interest rates as early as Aug. 3, potentially hurting Labor Prime Minister Julia Gillard’s bid to win the federal election on Aug. 21.

Gillard, who ousted former leader Kevin Rudd last month, is relying on holding seats in areas of western Sydney and Queensland that have large numbers of households with mortgages.

Stevens kept borrowing costs unchanged this month and in June, after boosting the benchmark lending rate by 150 basis points between early October and May from a half-century low of 3 percent, adding about A$3,600 ($3,200) a year to loan repayments on an average A$300,000 mortgage.

The bank’s interest-rate moves have also helped stoke a 10 percent gain in the nation’s currency against the U.S. dollar in the past 12 months, the second-best performer among the 16 most actively traded currencies. The Australian dollar traded at 90.13 U.S. cents at 10:24 a.m. in Sydney, close to its highest level since early May.

Traders are betting there’s a 24 percent chance of a quarter-percentage-point increase in the benchmark rate to 4.75 percent next week, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 10:19 a.m.

‘Materially Changed’

“The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” the bank said in minutes of its July 6 meeting released in Sydney last week.

Tomorrow’s figures are expected to show “further moderation in the year-ended underlying rate, although underlying inflation was likely to remain in the top half of the target range over the period ahead,” the minutes said.

Core inflation, as measured by the central bank’s so-called trimmed mean gauge, probably rose 3 percent in the second quarter from a year earlier, analysts surveyed by Bloomberg News predict. Governor Stevens and his board aim to keep inflation between 2 percent and 3 percent on average.

‘Next Tightening’

“Markets, commentators, economists and even the RBA seem to have concluded that the timing of the next tightening move is almost entirely dependent on whether June quarter underlying inflation is above 0.8 percent,” said Annette Beacher, an economist at TD Securities Ltd. in Singapore.

The outlook for inflation is “particularly uncomfortable as the economy expands to an expected above-trend pace and the unemployment rate falls below the key 5 percent level” at which a shortage of skilled workers begins to stoke wage gains, Beacher said.

A report published since the bank’s July meeting showed strengthening Chinese demand for raw materials helped stoke a mining boom that has pushed the unemployment rate down to 5.1 percent, below Japan’s level and almost half that of the U.S.

An index of Australian leading economic indicators increased 0.3 percent in May, the New York-based Conference Board said today.

Treasury reiterated yesterday its forecast that gross domestic product will rise 3 percent in 2010-11 and 3.75 percent the following fiscal year.

“Inflationary risks are on the upside, with the labor market reaching full capacity over the next year and the strong incomes boost from the terms of trade expected to see demand increasingly stretch the economy’s supply capacity,” the Treasury department said.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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