Australian inflation down, rate increase more distant

SYDNEY: Australian consumer prices were surprisingly tame last quarter while core inflation stayed below target for almost a second full year, leading investors to pare back the already slim chance of a rate hike for months to come.

The local dollar dived to a 4 month trough as the consumer price index (CPI) rose 1.8% for the year to September, below market forecasts of 2%.

Underlying inflation averaged around 1.85%, again missing estimates and actually a touch slower than in the second quarter.

Core inflation has now undershot the Reserve Bank of Australia’s (RBA) long-term target band of 2% to 3% for seven straight quarters, the longest period on record.

“Consumer prices are amazingly benign across the economy,” said Matt Sherwood, Sydney-based head of investment strategy for fund manager Perpetual Investments.

“That’s because wages growth is at an all-time low, and households are saving more to pay down their debt,” he said. “It tells me that the RBA is on hold not only in 2017 but also all of 2018.”

Investors battered the Australian dollar, sending it sliding 0.7% to US$0.7716, its lowest since mid-July.

Interest rate futures moved to further push out the likely timing of any hike. A rise in rates to 1.75% is now not fully priced in until November next year.

The Australian Bureau of Statistics reported its headline CPI rose 0.6% in the third quarter, from the second quarter when it edged up just 0.2%.

That missed market forecasts for a 0.8% increase, with vegetables, petrol and telecoms all falling in price. – Reuters