Australia recorded its slowest core consumer price growth in 14 years last quarter, sending the nation’s currency lower as traders boosted bets the Reserve Bank will reduce interest rates to a record low next month.
The central bank’s preferred measure of inflation eased to 0.3 percent from the previous quarter, the Bureau of Statistics said in Sydney today, the lowest reading since the third quarter of 1998. Economists predicted a 0.5 percent gain. The consumer price index advanced 0.4 percent from the prior three months, almost half the median forecast for a 0.7 percent increase.
Slower resource investment, rising unemployment and prices restrained by the currency’s longest stretch above parity in 30 years gives Reserve Bank of Australia Governor Glenn Stevens scope to cut the benchmark rate from 3 percent. Treasurer Wayne Swan said the high Australian dollar is curbing revenue and the government’s fiscal stance gives the RBA room to move.
“The exchange rate is dampening down imported inflation,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney. “There’s now a chance of an interest rate cut before mid-year.”
Tradables, such as imported electrical goods and clothing, fell 1.2 percent in the quarter. Non-tradables, or domestic inflation for goods and services that aren’t imported such as fast food and utilities, rose 1.3 percent from the previous three months, the report showed.
The nation’s currency, which remained above parity with the U.S. dollar for about 10 months, weakened, buying $1.0254 at 4:05 p.m. in Sydney compared with $1.0273 immediately before the report. Traders priced in a 52 percent chance the RBA will lower its benchmark rate next month, up from 40 percent seen yesterday, according to swaps data compiled by Bloomberg.
Australia’s four major banks surged on the prospect more rate cuts will spur demand for lending. Westpac Banking Corp. (WBC) rose 2.5 percent, Commonwealth Bank of Australia (CBA) closed 2.4 percent higher, National Australia Bank Ltd. reached the highest since May 2008, and Australia & New Zealand Banking Group Ltd. (ANZ) closed at the highest since November 2007.
Policy makers lowered borrowing costs six times in the 14 months through December to help offset the drag on growth from the local dollar and to boost industries including construction.
Deputy Governor Lowe
“What we are continuing to see is very low increases and in fact declines in prices of many internationally traded goods,” RBA Deputy Governor Philip Lowe said in response to a question on CPI after a speech in Shanghai today. “That’s partly because of the high value of the currency, but it also reflects the intense competition occurring in retailing.”
He declined to comment on monetary policy.
Today’s report showed the cost of education rose 5.7 percent in the first quarter and health costs gained 3 percent from three months earlier. Clothing and footwear prices declined 3.9 percent and furnishings, household equipment and services dropped 1.3 percent from the prior quarter, it showed. Food and non-alcoholic beverages declined 0.8 percent.
“The weakness in prices for things like furniture and household appliances also tells us that underlying demand in the economy remains weak and that companies lack pricing power,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd. that has about A$130 billion under management. “While past interest rate cuts are getting some traction the economy remains vulnerable and in need of more support ahead.”
Australian employers cut payrolls more than forecast in March, with the jobless rate unexpectedly increasing to 5.6 percent, the highest level since November 2009, government data showed April 11.
Today’s report showed the weighted-median gauge of inflation, a second core measure that excludes the largest price increases and declines, increased 0.5 percent in the first quarter, matching economists’ estimates for a 0.5 percent gain.
On an annual basis, the trimmed mean gauge advanced 2.2 percent, compared with economists’ forecasts for a 2.4 percent gain. The weighted median increased 2.6 percent versus an estimated 2.4 percent rise, today’s report showed.
The central bank aims for inflation of between 2 percent and 3 percent on average. The CPI increased 2.5 percent in the first quarter from a year earlier, compared with economists’ forecast a 2.8 percent increase.
Room on Rates
“Inflation is contained,” Swan told reporters in Brisbane after the release. “The government’s fiscal policy has given the RBA a lot more room to move over time, but the RBA will evaluate these matters in the normal way.”
Elsewhere in the region today, the Reserve Bank of New Zealand kept rates unchanged at a record low, and said borrowing costs are expected to be held through the end of the year. Consumer prices in Vietnam climbed 6.61 percent in April from a year earlier.
In Europe, a report today may show German business confidence fell for a second month in April. Spain will release producer price data for March, while economists predict Italy’s retail sales had a third straight month-on-month decline in February. The U.S. Commerce Department may report orders for durable goods dropped in March, a Bloomberg survey showed.
The RBA is trying to rebalance a two-speed economy where mining regions in the north and west thrive off Chinese demand, while manufacturing and tourism in the south and east struggle. Policy makers left borrowing costs unchanged this year, saying earlier reductions are gaining traction with households.
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