Slowing Wholesale Costs Boost Australia Interest Rate-Cut Scope: Economy

Prices paid by Australian producers, one of two gauges of cost pressures in the economy released this week, decelerated for a third straight quarter, boosting scope for the central bank to lower borrowing costs next month.

The producer price index advanced 0.3 percent in the October-to-December period from the prior quarter, when it gained 0.6 percent, the Bureau of Statistics said in Sydney today. That was less than the median estimate of 20 economists surveyed by Bloomberg News for a 0.4 percent increase.

Reserve Bank Governor Glenn Stevens cut interest rates last quarter at back-to-back meetings as Europe’s sovereign debt crisis clouds prospects for global growth. Australian government data on Jan. 25 is predicted by economists to show inflation slowed last quarter to the weakest pace since the height of the global financial crisis, increasing the chance of a third straight policy meeting of cuts.

Today’s report “adds to the expectation that there’s going to be a soft inflation outcome,” said Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore. A Feb. 7 rate cut is “locked and loaded,” she said.

The Australian dollar was little changed after the producer prices report. The so-called Aussie fetched $1.0470 at 1:15 p.m. in Sydney from $1.0464 before the release and $1.0484 on Jan. 20 in New York.

RBA’s Easing

The RBA’s Nov. 1 and Dec. 6 reductions were spurred by concern about the fallout from Europe’s financial problems.

Asian stocks swung between gains and losses as increasing home sales in the U.S. added to signs the world’s biggest economy is recovering, overshadowing uncertainties over continuing debt negotiations in Greece.

BHP Billiton Ltd., the world’s biggest mining company and Australia’s largest oil producer, lost 0.8 percent in Sydney after crude oil and metal futures dropped.

The MSCI Asia Pacific Index was little changed at 120.80 at 10:15 a.m. in Tokyo.

In Europe today, a report may show French business confidence ended a six-month skid this month, according to the median estimate of economists surveyed by Bloomberg News. A report on consumer confidence in Denmark may show an improvement, a survey of economists showed, while a report may show Russian producer prices gained 0.8 percent in December from a month earlier, half the increase in November.

In Paris, European Central Bank Governing Council members Jens Weidmann and Christian Noyer are scheduled to participate in a press conference with German Finance Minister Wolfgang Schaeuble and France’s Francois Baroin.

Slower Inflation

In Australia, today’s report showed the producer price index rose 2.9 percent in the fourth quarter from a year earlier, lower than the median forecast of 3 percent.

The increase in costs was driven by a 2.3 percent gain in the price of imported goods as the currency weakened, the report showed. The local dollar has fallen 5.5 percent since it reached $1.1081 on July 27, the highest level since it was freely floated in 1983.

The report showed the cost of industrial machinery and equipment manufacturing gained 3.2 percent, while prices dropped 21.8 percent in a category called other agriculture.

“The main source of disinflation came from agricultural prices as production in Queensland returned following severe weather and crop destruction in early 2011,” Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney, wrote in a report after the release. “Benign pipeline price pressures” may provide “some marginal support for the 25 basis-point cut we continue to expect,” he said.

Currency’s Effect

Australian inflation has eased as the currency remained above parity with the U.S. dollar and the nation’s retailers cut prices to encourage consumers to spend. The nation’s job market recorded its weakest year of employment growth in almost two decades, a government report showed this month.

Consumer prices in Australia probably advanced 0.2 percent in the fourth quarter from three months earlier, according to the median of 25 estimates in a Bloomberg News survey before the report later this week.

New Zealand last week recorded an unexpected drop in consumer prices in the fourth quarter.

Investors are pricing in an 82 percent chance Australia’s Stevens will lower borrowing costs by a quarter percentage point to 4 percent at the next meeting, a Credit Suisse Group AG Index showed.

Twenty-one of 22 economists surveyed by Bloomberg News predict Stevens will cut the benchmark rate to 4 percent.

Global Slowdown

The World Bank last week cut its global growth forecast by the most in three years, saying a recession in the euro region threatens to exacerbate a slowdown in emerging markets such as India and Mexico.

The global economy will grow 2.5 percent this year, down from a June estimate of 3.6 percent, the Washington-based institution said. The euro area may contract 0.3 percent, compared with a previous estimate of a 1.8 percent gain.

Stevens reduced the overnight cash rate target to 4.25 percent from 4.5 percent last month, citing “considerable turbulence” in financial markets and an increased chance of a “further material slowing in global growth.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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