Australian Inflation Accelerates in Policy Bind for RBA: Economy

Australia’s core consumer prices gained more than economists forecast last quarter, sending the Australian dollar to its highest in two weeks and creating a hurdle to further monetary policy easing.

The trimmed mean gauge rose 0.8 percent from the previous quarter, the Bureau of Statistics said, compared with the median forecast of 25 economists for a 0.6 percent gain.

The currency rose as investors pared bets on a further cut to the record-low 2.5 percent benchmark cash rate. Accelerating inflation poses a dilemma for central bank Governor Glenn Stevens, who this month resumed signaling that he’d prefer a weaker currency and is facing a slowdown in growth as mining investment wanes and the government cuts spending.

“Lowering the currency will be more difficult as it’s harder for the RBA to convincingly say that they’re likely to cut interest rates further when they’ve got inflation in the upper part of their target band,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney and a former Reserve Bank of Australia economist.

The currency strengthened, buying 94.33 U.S. cents at 4:35 p.m. in Sydney, touching the highest since July 10 and compared with 93.90 cents immediately before the report. The Aussie advanced 1.8 percent last quarter.

Traders are now pricing 4 basis points of cuts over the next 12 months, according to an index of swaps from Credit Suisse Group AG. That’s down from 11 points before the data.

Commonwealth Bank of Australia, the nation’s biggest lender, today put back its forecast for a rate increase to February from November, citing the strength of the currency.

Sounding Dovish

“If Stevens is trying to massage the Australian dollar then he is going to have to sound dovish and suggest rate rises are a ‘long’ way off,” Michael Blythe, Sydney-based chief economist at CBA, said in a research report.

The central bank has lowered borrowing costs by 2.25 percentage points since late 2011 as the local dollar’s strength dragged on growth and a mining investment boom crested.

“The RBA will likely stick to its guns and keep rates on hold at least through 2014 to ensure the recovery remains on track, even though inflation is at the upper end of the target,” said Katrina Ell, an economist at Moody’s Analytics in Sydney.

The consumer price index advanced 0.5 percent from the previous three months, matching economists’ estimates.

Non-tradables, or domestic inflation for goods and services that aren’t imported such as fast food and utilities, climbed 3.1 percent from a year earlier, the report showed. Tradables, such as imported electrical goods and clothing, rose 2.9 percent.

Tobacco Prices

Today’s report showed costs for medical and hospital services rose 4.6 percent and new dwelling purchases climbed 1.6 percent. Tobacco prices increased 3.1 percent, the report showed. Prices for domestic holiday travel and accommodation declined 3.8 percent, while automotive fuel fell 2.7 percent.

The weighted-median gauge of inflation, a second core measure that excludes the largest price increases and declines, advanced 0.6 percent in the second quarter, compared with the estimate for a 0.7 percent gain.

On an annual basis, the trimmed mean gauge advanced 2.9 percent, compared with economists’ forecasts for a 2.7 percent gain. The weighted median increased 2.7 percent, matching estimates, today’s report showed.

The central bank aims for inflation of between 2 percent and 3 percent on average. The CPI climbed 3 percent in the second quarter from a year earlier, matching estimates.

The statistics bureau also released a seasonally adjusted consumer price index that showed a 0.6 percent increase last quarter, for an annual gain of 3 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.

Stevens renewed jawboning on Australia’s currency in a speech in Hobart this month where he said “most measurements would say it is overvalued, and not just by a few cents.”

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