Australian Consumer Prices Index Rises 0.5% on Health

By Jacob Greber

July 22 (Bloomberg) -- Australian consumer prices rose in the three months through June, stoking speculation the central bank has finished a record round of interest-rate cuts.

The consumer prices index gained 0.5 percent from the first quarter, when it advanced 0.1 percent, the Bureau of Statistics said in Sydney today. That matched the median estimate of 19 economists surveyed by Bloomberg. Annual core inflation was 4.2 percent, which is above the central bank’s target range of 2 percent to 3 percent.

Traders raised bets on the size of future interest-rate increases after today’s report showed costs rose for health care, household contents and clothing. Australia’s economy was one of few including China to expand in the first quarter, helped by Governor Glenn Stevens’ decision to slash borrowing costs to a 49-year low of 3 percent.

“It’s becoming increasingly difficult to make a case for further rate cuts,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. Policy makers will be “thinking ‘do we want policy at 3 percent when all these green shots are growing into trees?’. The answer is no,” he said.

Investors increased bets Australia’s overnight cash rate target will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.

Currency Rises

Traders forecast the key rate will be 86 basis points higher in a year, the index showed at 12:30 p.m. in Sydney, compared with 82 basis points of gains before today’s report was released. At the start of June, they forecast 3 basis points of reductions. A basis point is 0.01 percentage point.

Australia’s currency rose to 81.56 U.S. cents at 12:35 p.m. in Sydney from 81.47 cents just before the report was released. The two-year government bond yield was unchanged at 4.13 percent.

Health costs rose 2.3 percent in the second quarter and prices of household contents and services advanced 2.2 percent, today’s report showed. By contrast, banking services charges fell 1.7 percent and food slipped 0.9 percent. The annual headline inflation rate slowed to 1.5 percent from 2.5 percent.

The Reserve Bank’s core inflation measures, which exclude the largest price increases and declines, were also published today. The weighted-median gauge of inflation advanced 0.8 percent in the quarter for an annual increase of 4.2 percent, the eighth quarter that the measure has held above the Reserve Bank’s target range.

Rate Cuts

“The very sticky core inflation measure means the Reserve Bank has been correct to remain on hold for the last couple of months,” said Annette Beacher, senior fixed-income strategist at TD Securities Ltd. in Singapore. “Moving aggressively last year has given them time to assess the data” this year.

Governor Stevens and his board left the overnight cash rate target at 3 percent on July 7 for a third month after cutting it by a record 4.25 percentage points between September and April.

The interest-rate cuts and A$22 billion ($18 billion) in government cash handouts to low and middle-income households are helping the economy rebound from the financial crisis, recent reports suggest.

Gross domestic product unexpectedly rose 0.4 percent in the first quarter from the previous three months, when it shrank 0.6 percent, unemployment has climbed less than forecast by the government, and business and consumer confidence have jumped.

Job Losses

“The early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” policy makers said in the minutes of their July 7 meeting released yesterday.

The jobless rate averaged less than 5.7 percent in the June quarter, below the 6 percent predicted by the Treasury department in May. Canberra-based Access Economics forecast yesterday that the unemployment rate will peak at 7.5 percent, a percentage point lower than the government’s prediction.

Still, central bank policy makers said yesterday they expect inflation to cool in coming months, increasing their scope to cut borrowing costs if needed to spur growth.

The Reserve Bank predicted in May that annual headline inflation will fall to within or below its target range of between 2 percent and 3 percent this year, after holding above 3 percent in 2008. The bank is due to revise its forecasts on Aug. 7.

“The current inflation outlook afforded scope for some further easing of monetary policy, if that were needed to give further support to demand at a later stage,” yesterday’s minutes said.

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