Bloomberg News

Linkers Signaling Inflation Poised to Slow: Australia Credit

November 02, 2011

Oct. 25 (Bloomberg) -- Bonds are signaling inflation in Australia has peaked amid speculation the nation’s resource- driven growth is decelerating.

Money managers expect consumer prices to rise an average of 2.49 percent annually in the next five years, the middle of the Reserve Bank of Australia’s target and down from a 4 1/2 year- high of 3.14 percent May 6, inflation-linked debt yields indicate. Data tomorrow will show inflation eased in the three months to Sept. 30, economists surveyed by Bloomberg predict.

Slower inflation increases the scope for RBA Governor Glenn Stevens to cut the developed world’s highest borrowing costs to boost the economy as Europe’s debt crisis weighs on global confidence and cools demand for the minerals and energy that drive Australia. The nation’s mining boom kept the gap between yields on Australia’s inflation-linked debt and rates on benchmark notes at the highest of eight developed markets tracked by Bloomberg.

“Weaker global growth will moderate some imported inflation,” Joshua Williamson, a senior economist in Sydney at Citigroup Inc., said. “A fairly low number for underlying inflation will provide the Reserve Bank with a reason to actually cut rates.”

Rate Cuts Seen

Investors are betting the central bank will reduce its overnight cash-rate target by more than a percentage point over the next 12 months from the current 4.75 percent, according to a Credit Suisse Group AG index. A separate measure showed a 71 percent chance the RBA will lower borrowing costs by a quarter point at its Nov. 1 policy meeting.

The outlook for inflation has held within 12 basis points, or 0.12 percentage point, of this year’s low even as yields climbed on government bonds that aren’t tied to consumer prices. Benchmark 10-year yields were little changed at 4.51 percent as of 2:28 p.m. in Sydney yesterday, heading for a monthly advance of 28 basis points.

Australian government bonds are the world’s best performers over the past year as employment growth slowed and confidence weakened, reflecting the European debt crisis and a tumble in shares that erased $10 trillion worth of equities worldwide last quarter.

The country’s debt returned 9.3 percent in the past 12 months, the most among 26 markets tracked by Bloomberg/EFFAS indexes.

Inflation Expectations

The gap between yields on Australian five-year inflation- linked debt and benchmark notes of similar maturity shrank to 2.37 percentage points on Oct. 4, the least since September 2010. The spread represents bond buyers’ estimates for average annual consumer-price gains over the lifetime of the bonds.

The nation’s debt linked to consumer-price changes offered investors an 11.5 percent return this year, the most behind the 12.6 percent advance for similar New Zealand notes, Bank of America-Merrill Lynch indexes show.

Inflation pressures are also likely to ease as the impact of floods and storms in the northeastern state of Queensland diminishes, reducing food prices. Australian banana prices soared 138 percent in the second quarter as crops were wrecked.

“The weather shocks to fresh fruit and vegetables prices are starting to unwind as new supply comes on to the market,” Westpac Banking Corp. said in a research report.

Tomorrow’s report will show consumer prices rose 0.6 percent last quarter from the previous three months, and 3.5 percent from a year earlier, according to the median estimate in the Bloomberg News survey.

Core Inflation

Core inflation, as measured by the central bank’s so-called trimmed mean gauge, advanced 0.6 percent from the previous quarter and 2.7 percent from a year earlier, the survey showed. The weighted-median gauge of inflation rose 0.6 percent in the quarter, for an annual increase of 2.7 percent.

The central bank aims to keep average inflation in a 2 percent to 3 percent range. Recent changes to CPI data by the statistics bureau showed underlying inflation figures were “lower than those previously published,” the RBA said in minutes of its Oct. 4 policy meeting published last week.

“There is unusual uncertainty around this release because this quarter is the first since CPI weights and methodology were revised,” said Roland Randall, an economist at TD Securities Inc. in Singapore. “The Australian Bureau of Statistics have also introduced a seasonally adjusted series.”

Mining Boom

Australia’s economy is being driven by demand from developing nations including China and India for iron ore, coal and natural gas. The central bank said this month the value of liquefied natural gas projects announced so far in 2011 is around A$70 billion ($73.4 billion).

That demand and interest rates that are 2.25 percentage points higher than any other developed nation spurred the Australian dollar to $1.1081 on July 27, the highest level since it was freely floated in 1983. It depreciated 10 percent last quarter as employment growth slowed and global risks increased. The so-called Aussie, the world’s fifth-most traded currency, was at $1.0476 as of 2:52 p.m. in Sydney.

The spread between the interest Australian banks pay when borrowing from each other for three months and swaps tracking expectations for the RBA’s benchmark rose 2.3 basis points yesterday to 29.4. The gap, which is a gauge of banks’ difficulty in accessing funds, closed at 61 basis points on Aug. 8, the widest since January 2009.

The extra yield investors demand to hold Australian corporate bonds instead of government debt was 250 basis points yesterday, after reaching 251 on Oct. 20 to match the widest spread since August 2009, Bank of America Merrill Lynch data show.

Default Swaps

The Markit iTraxx Australia index dropped five basis points to 177 as of 11:38 a.m. in Sydney, according to Credit Agricole CIB. That is the lowest since Sept. 16, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The RBA has said the local currency’s climb may also be helping restrain inflation by driving down import costs. Prices paid by Australian producers rose 0.6 percent in the July-to- September period from the prior quarter, when it gained 0.8 percent, the Bureau of Statistics said in Sydney yesterday. The median of 17 estimates in a Bloomberg News survey was for a 0.8 percent increase.

In a speech today RBA Deputy Governor Ric Battellino signaled no urgency to lower rates as policy makers weigh weak growth abroad against a domestic mining boom.

“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 told a forum in Sydney.

--With assistance from Daniel Petrie in Sydney. Editors: Garfield Reynolds, Brendan Murray

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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