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Australian inflation milder than expected, opening door for rate cuts

Tuesday 24th April 2012

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Australian inflation was slower than expected in the first quarter, opening the door for the central bank to cut interest rates starting next week and driving down its currency versus the greenback and the kiwi dollar.

The consumer price index rose 0.1 percent in the first three months of the year, according to the Australian Bureau of Statistics. Economists had expected a rate of 0.6 percent. Annual inflation was 1.6 percent against expectations of a 2.1 percent rate.

The central bank kept the cash rate unchanged at 4.25 percent this month, saying it wanted more time to assess the pace of inflation before contemplating further easing in monetary policy. It next reviews interest rates on May 1.

Traders are pricing in 108 basis points of cuts to the cash rate over the next 12 months, based on the Overnight Index Swap curve.

“You can bank on a 0.25% rate cut from the RBA at this meeting, and the market will now expect further rate cuts in the coming months,” traders at HiFX said in a note.

The trimmed mean measure of first-quarter CPI that the central bank watches was 0.3 percent, half the rate forecast by economists.

The Australian dollar fell to US$1.0275 from US$1.0319 immediately before the inflation figures were released and down from more than US$1.08 at the start of March.

The New Zealand dollar climbed to 79.18 Australian cents from 78.71 cents before the numbers were released.

A cut to the RBA’s cash rate would narrow its 175 basis point premium over New Zealand’s official cash rate of 2.5 percent and polish the relative appeal of the kiwi dollar.


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