TD Securities' Australian Annual Inflation Index Rose 4.2%

By Jacob Greber

Sept. 1 (Bloomberg) -- An index measuring Australian inflation held above the central bank's target range of 2 percent to 3 percent, limiting Governor Glenn Stevens' scope to cut borrowing costs in coming months.

Consumer prices rose 4.2 percent from a year earlier, down from 4.6 percent in the 12 months through July, according to a monthly gauge released by TD Securities Ltd. and the Melbourne Institute in Sydney today. Prices climbed 0.1 percent from July, when they rose 0.4 percent.

The Reserve Bank of Australia will probably cut its benchmark interest rate for the first time in almost seven years tomorrow as the nation's 17-year economic expansion cools, according 22 of 23 economists surveyed by Bloomberg. New home sales fell in July to a two-year low and lending to consumers and businesses rose at the slowest annual pace since 2002, reports showed last week.

``Inflation pressures still remain elevated despite the clear slowing in the economy,'' said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney.

``We now seriously doubt the scope for more than two or three quarter point interest-rate cuts if what we are seeing in the inflation gauge continues to be reflected in the official consumer price index.''

The biggest increase in the index came from rising prices for fruit and vegetables, insurance, gas and other household fuels, today's report said. Those gains were partially offset by cheaper gasoline, overseas holiday travel and accommodation.

Interest Rates

``Without the sharp fall in petrol prices, the gauge would have risen a record-equaling 0.6 percent for the month,'' Williamson said.

Investors expect Stevens will cut the benchmark borrowing cost by at least one percentage point in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps at 8:53 a.m. in Sydney.

The government releases its official quarterly inflation report, the consumer prices index, on Oct. 22. Annual inflation accelerated to 4.5 percent in the second quarter from 4.2 percent in the previous three months.

The Melbourne Institute is a research unit of Melbourne University and TD Securities is a division of Toronto-Dominion Bank, one of Canada's largest lenders. The monthly inflation index measures the prices of 1,000 goods and services.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net