Australia’s Producer Prices Unexpectedly Decline 0.4%

By Jacob Greber

April 20 (Bloomberg) -- Prices paid to Australian producers unexpectedly fell last quarter for the first time in almost six years, increasing the central bank’s scope to cut interest rates.

The producer price index declined 0.4 percent from the previous quarter, the Bureau of Statistics said in Sydney today. The median estimate of 15 economists surveyed by Bloomberg was for a 0.6 percent gain. The index rose 4 percent from a year earlier, slowing from 6.4 percent in the fourth quarter.

Wholesale inflation is cooling as the economy contracts amid a global recession that has cut prices for raw materials from copper to coal, reducing manufacturing costs. Reserve Bank of Australia Governor Glenn Stevens pared the benchmark rate to a 49-year low of 3 percent this month to revive domestic demand.

“Inflation is clearly not going to stand in the way of the Reserve Bank cutting rates further,” said Riki Polygenis, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Those decisions will be based more on what’s happening to demand in the economy.”

Today’s report is “consistent with a gradual easing in inflation pressures,” she added.

The Australian dollar traded at 71.64 U.S. cents at 12:25 p.m. in Sydney from 71.74 cents before the report was released, extending today’s slide. The two-year government bond yield fell 1 basis point, or 0.01 percentage point, to 2.91 percent.

Interest Rates

The Reserve Bank has slashed borrowing costs by 4.25 percentage points since early September. Investors are pricing in a 63 percent chance the bank will lower the overnight cash rate target by another quarter point on May 5, according to a Credit Suisse Group index based on swaps trading today.

Inflation pressures are easing across the globe. Wholesale prices in the U.S. tumbled 1.2 percent last month, and U.K. producer prices rose 2 percent, the smallest gain in 20 months. China’s producer prices dropped 6 percent in March.

With the Organization for Economic Cooperation and Development forecasting the steepest economic contraction in more than 50 years across its member nations, demand for resources has slowed, cutting prices for raw materials.

The Reuters/Jefferies CRB Index of 19 commodities fell 4 percent in the first quarter, extending last year’s 36 percent decline.

Australia’s economy shrank 0.5 percent in the fourth quarter, the first decline in eight years. The jobless rate jumped to 5.7 percent in March from 5.2 percent in February, the biggest gain since the economy was last in a recession in 1991.

Construction, Petroleum

Construction costs fell 1.6 percent in the first quarter and costs for petroleum refining dropped 10 percent, the producer prices report showed. In contrast, the cost of electricity, natural gas and water rose 2 percent last quarter from the previous three months.

A report this week may show the nation’s consumer-price inflation returned to the central bank’s 2 percent-to-3 percent target band for the first time in more than a year.

Consumer prices rose 2.8 percent in the first quarter from a year earlier, slowing from a 3.7 percent gain in the fourth quarter, according to the median estimate of 19 economists surveyed by Bloomberg. The report will be released on April 22.

“Deflation in the Australian context is still very unlikely,” said ANZ Bank’s Polygenis. “There is a big offset from the weaker Australian dollar.

The local currency tumbled 20 percent against its U.S. counterpart in 2008, making imports of machinery, gasoline and equipment more expensive. The Australian dollar has gained 2.5 percent so far this year.

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