Bloomberg News

Australian Core Inflation Slows to Weakest Pace in 14 Years

November 02, 2011

Oct. 26 (Bloomberg) -- Australia’s underlying inflation slowed last quarter to the weakest pace in 14 years, sending the nation’s currency lower as traders bet the central bank will cut interest rates next week.

The average of two core measures of consumer prices closely watched by the Reserve Bank of Australia showed a 0.3 percent gain in the three months through September from the previous quarter, the Bureau of Statistics said in Sydney today. That was half the pace predicted by economists and the smallest rise since the third quarter of 1997.

“These are extraordinarily low numbers,” said Bill Evans, chief economist at Sydney-based Westpac Banking Corp., in an interview on Bloomberg Television, who today brought forward his rate-cut call to next week from the RBA’s December meeting. “There’s a lot of softness in this economy.”

Three-year bond yields fell by the most in more than a month as the report increased scope for RBA Governor Glenn Stevens to cut rates for the first time since April 2009 from a developed-world high of 4.75 percent. Slower demand for credit and discounting by grocery retailers tempered price gains, while Europe’s debt crisis dimmed prospects for global growth.

The Australian dollar fell to $1.0372 at 2:17 p.m. in Sydney, from $1.0430 just before the release. Government bonds surged, with the yield on the three-year note dropping 17 basis points to 3.74 percent, the biggest decline in more than a month.

Next Meeting

The RBA will lower the overnight cash rate target on Nov. 1 and take 120 basis points off the benchmark in the coming 12 months, according to Credit Suisse Group AG indexes that use swap trades.

After today’s report, a survey of economists showed 12 of 18 predicted the RBA will reduce rates next week.

The consumer price index rose 0.6 percent last quarter from the previous three months, when it gained 0.9 percent, as the costs of food and health declined, the statistics bureau said today. That matched the median estimate in a Bloomberg News survey of 21 economists. Consumer prices were 3.5 percent higher than a year earlier, after a 3.6 percent rise the previous quarter, today’s report showed.

Stevens’s deputy, Ric Battellino, yesterday signaled no urgency to lower rates as policy makers weigh weak growth abroad against a domestic mining boom. He cited recent improvements in Australian retail sales, housing loans and employment.

Scope to Cut

“It remains to be seen how the Australian economy will respond to the recent financial volatility and the consequent fall in confidence and the loss of wealth,” Battellino said in a speech in Sydney. He also reiterated the RBA’s view that it has scope to reduce borrowing costs if needed as a slower domestic expansion eases inflation concern.

Today’s report showed measures that exclude the largest price increases and declines gained at a slower pace than forecast.

Core inflation, as measured by the central bank’s so-called trimmed mean gauge, rose 0.3 percent from the previous quarter and 2.3 percent from a year earlier. Economists forecast a quarter-to-quarter gain of 0.6 percent and annual rise of 2.7 percent.

The weighted-median gauge of inflation advanced 0.3 percent in the third quarter, the lowest rate of increase since 2000, for an annual increase of 2.6 percent. Economists forecast a quarterly rise of 0.6 percent and annual increase of 2.7 percent.

The statistics bureau also released a seasonally adjusted consumer price index that showed a 0.4 percent increase last quarter, for an annual rise of 3.5 percent.

Weaker Currency

The nation’s currency depreciated almost 10 percent last quarter as employment growth slowed and global risks increased. It reached $1.1081 on July 27, the highest level since it was freely floated in 1983.

The price of crude oil also plunged 17 percent in New York trading in the third quarter, touching $75.71 a barrel on Aug. 9, the lowest level in almost a year. Stocks around the world dropped last quarter, Treasuries rallied and gold surged to a record, after Standard & Poor’s Aug. 5 reduction of the U.S.’s credit rating fueled concern of an economic slowdown.

The cost of food, which at 16.8 percent is the second- biggest component in the consumer price basket, dropped 0.2 percent as retailers such as Wesfarmers Ltd. reduced the price for staples like bread, milk and eggs. The category also benefited from resumed supply 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.

Rising Rent

Costs of housing, which includes rent, home purchases and utilities, and at 22.3 percent is the biggest component of the index, gained 1.9 percent last quarter, today’s report showed.

Apartment rents climbed 4.3 percent in August from a year ago, while rents for houses gained 5 percent, according to real estate researcher RP Data. The power bill for an average three- person household in New South Wales, Australia’s most populous state, would have risen about 16 percent from July 1, based on price changes brought in by EnergyAustralia and government estimates of electricity usage.

Transportation costs rose 0.1 percent, as a 3.8 percent increase in automobile maintenance and repair offset a 1.4 percent decline in automotive fuel, the report showed.

The price of tradable goods and services, which are largely determined by the international market, declined 0.2 percent in the third quarter from the previous three months, today’s report showed. That was the first drop since the fourth quarter of 2008.

‘Great Heart’

Treasurer Wayne Swan said today the moderation in inflation is welcome and that fruit prices will unwind as agriculture recovers from this year’s natural disasters. He said the Reserve Bank should take “great heart” from today’s report.

In today’s release, the statistics bureau changed the weightings it gives for the components of the index. It raised the contribution of food and alcohol, housing, health and recreation, while lowering the weightings of furnishings and household equipment, transportation, and insurance and financial services.

Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia, said today’s report isn’t enough to prompt the RBA to lower borrowing costs.

“We still believe the low-ball CPI prints need to be accompanied by bad news offshore before the RBA will cut,” Walters said. “Yesterday, we learned that officials have not capitulated on the mammoth mining investment boom and continue to forecast robust growth in Australia’s major trading partners. This is very unlikely to change before next Tuesday.”

--With assistance from Daniel Petrie, Candice Zachariahs, Sarah McDonald, Victoria Batchelor, Garfield Reynolds and Malcolm Scott in Sydney. Editors: Brendan Murray, Garfield Reynolds

To contact the reporter on this story: Michael Heath in Sydney at

To contact the editor responsible for this story: Stephanie Phang at

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