Australia reports milder inflation

Wednesday 28th July 2010

Australia reported milder-than-expected inflation in the second quarter, easing pressure on the central bank to raise interest rates and sending the Australian dollar lower.

The consumer price index rose 0.6% in the second quarter from the first three months of the year, according to the Australian Bureau of Statistics. That’s less than the 1% rate expected in a Reuters survey. Annual inflation sped to 3.1%.

The Australian dollar sank to 89.21 US cents after the report from 90.05 cents immediately before the numbers were released. The kiwi dollar climbed to 81.54 Australian cents from 81.09 cents as the CPI figures stoked expectations for a narrowing rate gap between the two countries.

The Reserve Bank of Australia kept its cash rate unchanged at 4.5% this month, saying it could afford to wait for more evidence of resurgent inflation. By Contrast, New Zealand’s central bank is expected to raise the official cash rate a quarter point to 3% tomorrow.

“Currency traders got a surprise,” said UBS investment bank senior economist Robin Clements.

“The basic premise is that with lower inflation, there would be less need for interest rates to go up in Australia.”

Before the CPI data was released, traders had been betting the RBA would hike its benchmark rate as soon as next week.

Australia was the first developed economy to resume tightening monetary conditions after the global financial crisis, having skirted a recession that battered the world’s largest nations apart from China. Resilient demand in China helped underpin Australia's economy.

Keeping inflation tepid, recreation costs dropped 1.8% in the three months ended June 30, the biggest quarterly decline in more than 20 years. Prices also fell for communications, while prices of tobacco and alcohol gained.

Core inflation, using the so-called trimmed mean gauge, rose 2.7% in the second quarter from a year earlier.

Businesswire.co.nz

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