Australian inflation unexpectedly accelerated above the mid-point of the central bank’s target range last quarter, reducing scope for policy makers to lower interest rates further.
The trimmed mean gauge of core prices rose 2.6 percent in the three months through December from 12 months earlier, the Bureau of Statistics said in Sydney today, compared with the median forecast of 23 economists for a 2.3 percent gain. The consumer price index advanced 2.7 percent, compared with economists’ forecast for a 2.4 percent increase.
The currency rose as investors pared bets Reserve Bank of Australia Governor Glenn Stevens will cut the record-low 2.5 percent benchmark rate further. The RBA reduced borrowing costs by 2.25 percentage points since late 2011 as a mining investment boom crests. The Australian dollar was the worst performing group of 10 currency after the yen last quarter.
“It was a significant upside surprise for the market and for the RBA,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney and a former RBA economist. “It seems to reflect that the Aussie dollar’s effect on holding down inflation has finally started to wear off. It looks as though inflation has passed its trough and we are still of the view that the RBA won’t be cutting rates any further.”
The currency strengthened, buying 88.61 U.S. cents at 3:35 p.m. in Sydney compared with 87.91 cents immediately before the report. Traders cut bets on a rate cut by June to about 20 percent compared with more than 40 percent yesterday.
Non-tradables, or domestic inflation for goods and services that aren’t imported such as fast food and utilities, climbed 3.7 percent from a year earlier, the report showed. Tradables, such as imported electrical goods and clothing, rose 1 percent from a year earlier. The Aussie retreated 4.3 percent last quarter, the biggest slide among group of 10 currencies outside the yen.
Today’s report showed fruit prices jumped 8.1 percent from the previous three months and vegetable prices rose 7.1 percent in the fourth quarter. The cost of new dwelling purchases by owner occupiers gained 1 percent due to higher building materials and labor charges. The price of automotive fuel fell 1.1 percent from the prior quarter, it showed.
The trimmed-mean reading rose 0.9 percent from three months earlier versus economists’ forecast for a 0.6 percent increase. The weighted-median gauge of inflation, a second core measure that excludes the largest price increases and declines, advanced 0.9 percent from three months earlier, compared with economists’ estimates for a 0.6 percent gain.
On an annual basis, the weighted median increased 2.6 percent versus an estimated 2.3 percent rise, today’s report showed.
“At present, inflation is not a threat to the economy, meaning that rates can stay at these exceptionally low levels over the near term,” said Savanth Sebastian, an economist in Sydney at a unit of Commonwealth Bank of Australia. “However the medium term outlook for inflation has certainly shifted higher.”
The CPI increased 0.8 percent in the fourth quarter from the previous three months, compared with economists’ forecast for a 0.4 percent increase. The statistics bureau also released a seasonally adjusted consumer price index that showed a 0.9 percent increase last quarter, for an annual gain of 2.6 percent.
The RBA is trying to rebalance the economy away from mining regions in the north and west as investment wanes, and stimulate growth in manufacturing, residential construction and retail in the south and east. The central bank aims for inflation of between 2 percent and 3 percent on average.
The RBA may also be reluctant to lower borrowing costs further amid surging property values. Sydney home prices climbed 14.5 percent last year as the nation recorded its fastest increase in a calendar year since 2009, an RP Data-Rismark home value index showed.
Instead, Stevens has sought to engineer a weaker currency in recent months by pointing out that it’s probably overvalued.
Bloxham said one effect of today’s data is that “the RBA’s campaign to talk the Aussie dollar lower may be coming towards its end because if inflation is already picking up even before we’ve seen the full effect of the Aussie dollar, then they may not want the Aussie dollar to fall a whole lot further.”