Australia Inflation Cools to Slowest in Decade, Eases Rate Talk

Oct. 28 (Bloomberg) -- Australian inflation cooled to the slowest pace in 10 years, easing pressure on central bank Governor Glenn Stevens to increase the benchmark lending rate by half a percentage point next week.

The consumer price index rose in the third quarter by an annual 1.3 percent, the smallest gain since the second quarter of 1999, after advancing 1.5 percent in the previous three months, the Bureau of Statistics said in Sydney today. Prices rose 1 percent from the second quarter.

Australia’s dollar fell after the report as traders boosted bets Stevens will slow the pace of future interest-rate increases. The Reserve Bank of Australia, the first Group of 20 central bank to raise borrowing costs since the height of the global financial crisis, said keeping borrowing costs too low may threaten its goal of maintaining inflation between 2 percent and 3 percent on average.

“Anyone worrying about inflation in the near term is barking up the wrong tree,” said Prasad Patkar, who helps manage about $1.3 billion at Platypus Asset Management in Sydney. “Today’s report probably won’t alter the RBA’s stance on gradually withdrawing monetary stimulus from ‘emergency’ levels.”

The Australian dollar fell to 91.41 U.S. cents at 12:15 p.m. in Sydney from 91.80 just before the report. Australia’s two- year government bond yield declined 8 basis points to 4.85 percent. A basis is 0.01 percentage point.

Bets Pared

Investors are certain Governor Stevens will increase the rate by a quarter point on Nov. 3, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is also a 10 percent chance of a half-point increase, the futures showed at 12:37 p.m., down from 16 percent prior to the report.

Food prices fell 0.8 percent and health costs slipped 1 percent in the third quarter, today’s report showed. By contrast, electricity costs rose 11.4 percent and gasoline advanced 4 percent.

The median estimate of economists surveyed by Bloomberg News was for annual inflation of 1.2 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 third quarter for an annual increase of 3.8 percent. Economists forecast gains of 0.8 percent and 3.7 percent respectively.

“The Reserve Bank is on a path back to neutral but there’s nothing in the data that suggests they have to ramp up their rhetoric or their tightening,” said Annette Beacher, senior strategist at TD Securities in Singapore.

Strengthening Economy

Signs are mounting that Australia’s economy, one of the few including China and India to skirt a recession in the first half of this year, will strengthen in coming months.

Reports published since Sept. 30 show consumer confidence jumped this month to the highest level in more than two years, business sentiment held last month near a six-year high, retail sales rose in August, and house prices climbed 7.9 percent this year through August.

An index of skilled vacancies in Australia rose 1.9 percent in October from September, a report today showed.

Gross domestic product expanded 1 percent in the first half of this year as consumers increased spending, spurred by the central bank slashing borrowing costs by a record 4.25 percentage points between September last year and April, plus A$42 billion ($39 billion) in government stimulus spending.

‘Trend’ Pace Growth

Governor Stevens expects GDP growth to accelerate close to its “trend” pace of 3 percent next year.

Australia’s experience of the global recession has been “much milder than elsewhere,” Assistant Governor Malcolm Edey said in Sydney today. “Australia came into the most intense phase of the crisis period in better shape than most, and with more scope than most to make timely macroeconomic policy responses.”

The economy’s rebound from the worst global recession since the Great Depression was a key reason central bank policy makers raised the benchmark interest rate to 3.25 percent from a 49- year low of 3 percent on Oct. 6.

Keeping the rate at “very low levels” may be “imprudent,” the bank said in minutes of its October meeting, published last week.

“While the current forecasts suggested inflation would fall in the coming year, the expected trough in inflation was significantly higher than earlier thought,” the bank said on Oct. 20. “By 2011 inflation could be rising again.”