Australia inflation edges up, market nixes rate cut

[SYDNEY] Australian consumer prices rebounded by more than forecast last quarter while the annual pace of core inflation edged up for the first time in over a year, leading investors to price out almost any chance of a near-term cut in interest rates.

The local dollar jumped half a US cent when key measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) showed an average rise of 0.4 per cent in the third quarter, matching expectations.

The annual pace inched up to 1.6 per cent, from a record low of 1.5 per cent, a tentative sign inflation may have finally bottomed after a run of surprisingly subdued readings.

Investors reacted by selling interbank futures so that they implied just a 4 per cent chance of a rate cut at the RBA's next policy meeting on Nov 1.

The local dollar quickly climbed to US$0.7690 on the numbers, though it continues to have trouble overcoming stubborn resistance above 77 US cents.

"The print is in line with the RBA's forecast and coupled with mixed data, it very much suits with them staying on hold for some time, probably well into 2017," said Su-Lin Ong, a senior economist at RBC Capital Markets.

"There remains an implicit easing bias but that is unlikely to be exercised any time soon."

The RBA had repeatedly underlined the importance of the inflation report for policy, and with good reason.

It was uncomfortably low inflation readings in the first and second quarters that led directly to rate cuts in May and August, leaving the cash rate at an historic low of 1.5 per cent.

When setting policy, the RBA looks at three underlying measures of the consumer price index (CPI) - the trimmed mean, weighted median, and prices minus fruit, vegetables and petrol.

The headline CPI tends to be more volatile and subject to one-off price shifts. It rose 0.7 per cent in the third quarter taking the annual pace to 1.3 per cent, from one per cent.

The most significant price rises in the quarter were fruit, electricity, vegetables, tobacco and property rates and charges (+4 per cent). They were partially offset by falls in automotive fuel and telecoms equipment and services.

The RBA has sounded reluctant to ease again, in part because ever-lower rates could prove counter-productive.

Just last week, RBA Governor Philip Lowe cautioned that trying to get inflation higher in a hurry might stoke a borrowing binge in the housing market, which is already running hot in Sydney and Melbourne.

Record low mortgage rates have also stimulated a boom in home building. While this provides a much-needed boost to economic activity, it has also depressed rental growth.

Indeed, the slowdown in rents has been the single biggest factor pushing down on inflation, meaning policy easing has been adding to the problem it was meant to fix.

REUTERS