Australia's Annual Inflation Probably Accelerated

By Jacob Greber

July 22 (Bloomberg) -- Australia's annual inflation rate probably accelerated in the second quarter, reinforcing speculation the central bank will leave borrowing costs at a 12- year high.

The consumer price index rose 1.3 percent in the quarter for an annual gain of 4.3 percent, up from 4.2 percent in the previous three months, according to the median estimate of 22 economists surveyed by Bloomberg News. The Bureau of Statistics releases the figures at 11:30 a.m. in Sydney tomorrow.

A surge in prices, stoked by a 74 percent jump in the cost of crude oil in the past 12 months, gives central bank Governor Glenn Stevens little scope to cut borrowing costs even as the nation's 17-year economic expansion slows. Stevens raised the benchmark interest rate to 7.25 percent in March to try to bring inflation back within his target range of 2 percent to 3 percent.

``Unless the inflation figures are significantly above expectations, borrowers can look forward to the Reserve Bank sitting on the sidelines for an extended period,'' said Craig James, an economist at Commonwealth Bank of Australia in Sydney.

Stevens faces the same challenge as policy makers around the world in balancing higher inflation with slowing economic growth. Consumer prices in the U.S. surged 5 percent in the year through June, the biggest jump since 1991, and in Europe they climbed 4 percent, the fastest pace in more than 16 years.

The Australian dollar rose to 97.65 U.S. cents at 9:33 a.m. in Sydney from 97.46 cents late yesterday. The two-year government bond yield was unchanged at 6.62 percent.

Producer Prices

The Reserve Bank of Australia's measure of core annual inflation, the so-called weighted median, held at a 17-year high of 4.4 percent, according to the median estimate of economists surveyed by Bloomberg.

Prices paid to Australian producers rose less than economists forecast in the second quarter. The producer price index advanced 1 percent, a report showed yesterday.

Stevens raised borrowing costs in March for the fourth time in seven months on concern demand for skilled workers at mining companies such as Rio Tinto Group threatens to drive up wages.

Unemployment fell to 3.9 percent in February, the lowest level in more than three decades. The rate was 4.2 percent last month.

``The main drivers of headline inflation in the quarter will be food and energy prices, holiday travel and accommodation, electricity, home construction costs and financial services,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney.

Economic Growth

``Inflation will stay elevated in coming quarters,'' and will probably peak at 4.5 percent in the fourth quarter, he said.

Still, faster inflation figures ``no longer are triggers for Reserve Bank policy action,'' Walters said. ``Trends in domestic demand are more important.''

The chances of keeping inflation low over the medium term are good as higher borrowing costs cool the $1 trillion economy, which expanded at the slowest pace in almost two years in the first quarter, Stevens said last week.

While the consumer price index ``might rise further before it starts to come down,'' central bank policy makers ``still expect inflation to fall back to 3 percent by mid-2010, and to continue declining gradually thereafter,'' he said on July 16.

The Reserve Bank left borrowing costs unchanged on July 1 for a fourth month to gauge fallout from a global credit squeeze that has prompted Australia's five largest lenders to increase mortgage rates by an average of 105 basis points this year. The central bank has added 50 basis points to the benchmark rate in that time.

Consumer Confidence

Policy makers review rates again on Aug. 5 and will publish revised forecasts for inflation and growth on Aug. 11.

There is ``pretty clear evidence'' that rising gasoline prices and higher borrowing costs are forcing consumers and businesses to cut spending, Stevens said last week.

Consumer confidence slumped in July to the lowest level in 16 years, businesses were the most pessimistic in June since 2001 and home-loan approvals fell in May by the most in eight years.

Investors have increased bets that the central bank will cut interest rates, according to a Credit Suisse Group index based on trading in interest-rate swaps. Traders expect Stevens will lower the benchmark rate by 9 basis points, or 0.09 percentage points, in the next 12 months. At the start of this month, they forecast 19 basis points of gains.

Bloomberg Survey

Following is a table of forecasts for the consumer price index and for the central bank's weighted median and trimmed mean measures of inflation in the second quarter from the first quarter, and from a year earlier:

                        Headline     RBA Trimmed  RBA Weighted
                         CPI            Mean        Median
                      QoQ%   YoY%    QoQ% YoY%    QoQ%  YoY%
------------------------------------------------------------
Median                1.30%  4.30%  1.10% 4.30%  1.10%  4.40%
High                  1.50%  4.50%  1.30% 4.80%  1.30%  4.70%
Low Forecast          1.00%  4.00%  0.90% 4.00%  0.90%  4.10%
Number of replies      22     22     21    21     21     21
------------------------------------------------------------

4Cast                 1.30%  4.30%  1.20% 4.40%  1.20%  4.70%
ABN Amro              1.10%  4.10%  1.10% 4.30%  1.10%  4.30%
ANZ Bank              1.30%  4.30%  1.30% 4.50%  1.30%  4.70%
Ausbil Dexia          1.20%  4.20%  1.10% 4.40%  1.10%  4.40%
BT Financial          1.20%  4.20%  0.90% 4.10%  0.90%  4.40%
Citi                  1.00%  4.00%  1.00% 4.20%  1.00%  4.10%
Deutsche Bank         1.20%  4.20%  1.20% 4.30%  1.20%  4.70%
Goldman Sachs         1.10%  4.10%  1.10% 4.80%  1.10%  4.10%
ICAP Australia        1.50%  4.50%  1.20% 4.40%  1.20%  4.70%
JP Morgan Chase       1.40%  4.40%  1.20% 4.40%  1.20%  4.70%
Lehman Brothers       1.00%  4.00%  1.00% 4.20%  1.00%  4.10%
Macquarie             1.30%  4.30%  1.00% 4.30%  1.00%  4.30%
Merrill Lynch         1.20%  4.20%  1.10% 4.30%  1.00%  4.50%
Moody's Economy.com   1.30%  4.30%   --    --     --     --
National Australia    1.40%  4.40%  0.90% 4.10%  0.90%  4.30%
Nomura                1.40%  4.40%  1.20% 4.40%  1.20%  4.70%
Royal Bank of Canada  1.30%  4.30%  1.10% 4.30%  1.10%  4.60%
Suncorp Banking       1.30%  4.40%  1.00% 4.10%  1.00%  4.10%
TD Securities         1.30%  4.30%  1.00% 4.30%  1.00%  4.30%
Thomson Reuters       1.40%  4.40%  1.10% 4.00%  1.10%  4.30%
UBS Australia         1.00%  4.00%  0.90% 4.10%  1.00%  4.50%
Westpac Bank          1.20%  4.20%  1.20% 4.30%  1.20%  4.60%
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To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net