Australian Core Inflation Quickens; Currency Gains as Rate-Cut Bets Pared

Australia’s core inflation rate accelerated above the middle of the central bank’s 2 percent to 3 percent annual target range last quarter, prompting traders to pare bets on another interest-rate reduction next month.

The annual trimmed mean, which diminishes sharp price swings, quickened to 2.6 percent from the third quarter, when it rose a revised 2.4 percent that was faster than previously reported, the Bureau of Statistics said in Sydney today. The overall inflation rate was unchanged last quarter from the prior three months as the price of bananas plunged 46 percent.

The currency rose as futures traders saw about a 50-50 chance Reserve Bank of Australia Governor Glenn Stevens will reduce the benchmark rate for a third straight meeting to 4 percent, compared with 21 of 22 economists surveyed by Bloomberg News who predict a cut. Stevens lowered borrowing costs in November and December as Europe’s debt crisis dimmed prospects for global growth.

“Europe may still push them over the line but the inflation numbers don’t seem to be a trigger for another back- to-back cut,” said Kieran Davies, Sydney-based chief economist at Royal Bank of Scotland Group Plc and the only one not predicting a rate increase on Feb. 7. “You saw another revision to history from the underlying inflation.”

The nation’s currency rose to $1.0514 at 3:47 p.m. in Sydney compared with $1.0470 immediately before the report. The so-called Aussie appreciated 5.7 percent last quarter. Traders are pricing in a 52 percent chance Stevens will cut by a quarter percentage point, down from 60 percent before the report.

Core Rate

Core inflation measures, which exclude the largest price increases and declines, showed more price pressure in the second half of 2011 than economists had previously forecast.

The unchanged main inflation rate last quarter was slower than the 0.2 percent increase estimated by economists and was the weakest figure in three years. It gained 3.1 percent in the fourth quarter from a year earlier, today’s report showed.

The cost of food, which at 16.8 percent is the second- biggest component in the consumer-price basket, dropped 1.5 percent as supply of fruit benefitted from resumed shipments from Queensland after floods and storms in the northeastern state wrecked crops and sent the price of bananas soaring 138 percent in the second quarter.

Health costs declined 1.2 percent as the price of pharmaceuticals fell 5.6 percent, the report showed.

Housing Gains

In contrast, the costs of housing, which includes rent, home purchases and utilities, and at 22.3 percent is the biggest component of the index, gained 0.4 percent last quarter, today’s report showed.

Apartment rents climbed 5 percent in Australia’s eight capital cities in November from a year ago, while rents for houses rose 4.3 percent, according to real estate researcher RP Data.

Communication increased 1.1 percent, and recreation and culture gained 0.8 percent, today’s report showed.

The statistics bureau also released a seasonally adjusted consumer-price index that showed a 0.2 percent increase last quarter, for an annual increase of 3 percent.

“This tells us that inflation pressures were contained in the second half of 2011 and it certainly leaves the door open for the RBA to consider further rate cuts,” said Paul Bloxham, chief economist for HSBC Holdings Plc in Sydney and a former central bank official.

‘Sigh of Relief’

“The RBA will probably be breathing a huge sigh of relief at the moment,” he said. “They had one observation of inflation in the third quarter, it was surprisingly low, they moved rates on the back of not feeling concerned about inflation because of that one observation.”

Australia’s consumer prices are stronger than those in neighboring commodity exporter New Zealand, where they dropped 0.3 percent from the third quarter, government data showed last week.

Australia’s growth is being driven by a surge in investment by resource companies that are supplying emerging economies including China and India with coal, iron ore and natural gas. Other parts of the economy, including tourism and manufacturing, are struggling because of the currency’s strength.

The so-called two-speed nature of Australia’s economy was reflected in the loss of 29,300 jobs in December, capping the worst year for employment since 1992. Consumer and business confidence have eased as Europe’s debt crisis deepens.

The RBA has more scope to cut borrowing costs than the central banks of New Zealand, Norway, Sweden, Canada and the euro region, where benchmark policy rates range from 1 percent to 2.5 percent. Rates in Japan and the U.S. are near zero.

The International Monetary Fund yesterday cut its forecast for global growth and warned that the European debt crisis threatens to derail the world economy.

The fund, in an update of its World Economic Outlook report, lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent. The expansion next year will be 3.9 percent, down from 4.5 percent. The euro area may enter a “mild recession” in 2012 as it shrinks 0.5 percent. The U.S. outlook was unchanged at 1.8 percent 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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