By Chris Zappone
Update Consumer prices rose less than expected in the September quarter as fuel and vegetable prices tumbled, reducing the likelihood that the Reserve Bank will hike its key interest rate next week.
Consumer inflation came in at 0.7 per cent for the three months to September 30, quickening from the 0.6 per cent increase in the previous three month, the Australian Bureau of Statistics said.
Still, the number was less than the 0.8 per cent expected, and prompted economists to say the Reserve Bank will probably leave official interest rates unchanged when its board meets on Tuesday.
''This is great news for anybody with a mortgage,'' said Brian Redican, senior economist at Macquarie. "It means there's absolutely no urgency now to raise rates next week."
''It's pretty surprising,'' said Colonial First State analyst James White. ''It's going to make it pretty difficult for the RBA to raise rates in that environment.''
The RBA last month shocked pundits and investors alike by leaving its cash rate unchanged at 4.5 per cent. In its published minutes of the rates meeting, the bank described its decision as ''finely balanced,'' and that it needed more information about price pressures in the economy.
''Today’s inflation figures show that both CPI inflation and underlying inflation in Australia have continued to moderate,'' Treasurer Mr Wayne Swan told reporters in Canberra.
Mr Swan singled out the rising dollar - which gained about 13 per cent in the September quarter against the US dollar - as helping to keep prices in check. The dollar's effect is likely to show up in subsequent quarters, he said.
''The higher dollar does make it harder for some businesses in trade-exposed sectors,’’ Mr Swan said. ''It also does mean lower prices for consumers and cheaper capital equipment for businesses.’’
Dollar sinks
The Australian dollar dived, though, on the inflation news. It shed more than a US cent to fall below 97.2 US cents, as investors pared back their expectations of an RBA rate rise, and then concerns about the US economy added to the selling.
On an annual basis, consumer prices rose 2.8 per cent in the September quarter, in line with similar increases in the previous six months. Economists had predicted a 2.9 per cent annual rate.
And the central bank's preferred inflation measures easily fell with its target of 2-3 per cent. The average of its trimmed mean and weighted median gauges came in at 2.4 per cent, the lowest since the December quarter of 2005.
Interest rate futures - a measure of the market's bet on a rate rise next month - slumped to a 16 per cent chance compared with a 57 per cent probability before the release of today's inflation numbers, according to Credit Suisse.
Cheaper vegies
This is great news for anybody with a mortgage
Petrol prices dropped 3.7 per cent in the quarter, vegetable prices dropped 5.4 per cent and pharmaceuticals prices sank 3.9 per cent, the ABS said.
Going the other way, tobacco and alcohol prices climbed 3.1 per cent, water and sewerage utilities jumped 12.8 per cent and electricity prices rose 6 per cent. Property rates and charges also increased 6.2 per cent.
Colonial First State analyst James White said the price gains in alcohol and tobacco are likely to be temporary.
"The one pressure point is housing," he said. "It looks like housing costs are rising across Australia, mainly in higher rents, so this may be an area of concern for the bank if credit growth or house prices start to take off."
Among the capital cities, prices in Sydney rose 0.8 per cent and 0.6 per cent in Melbourne.
Perth's prices nudged up 0.5 per cent, while in Brisbane they jumped 1 per cent in the quarter, the ABS said.
Banks on notice
Economists say a Melbourne Cup Day rate rise by the RBA is now unlikely, although an increase before the year's end remains a real prospect particularly as the economy continues to absorb rising revenues from the commodities boom.
Commercial banks, though, have signalled they may move independently of the central bank and lift lending rates to cope with higher funding costs of their own. Such an increase, though, would likely spark condemnation by borrowers and politicians alike, particularly with bank profits on the rise. NAB today announced a jump in its latest earnings.
Mr Swan said banks had no reason to lift lending rates faster than the central bank hiked its cash rate.
"The data I think justifies my view, my very strong view, that there is no justification for any additional rise over and above any official decision taken on the cash rate by the Reserve Bank," said Mr Swan said in response to the NAB results.
December risk?
Today's CPI result ''buys the RBA a bit more breathing space. There are enough factors on their side to stay their hand for another month, though we are pencilling in a December hike to signal the next move is up,'' said Annette Beacher, senior strategist, TD securities.
"But we do see inflation at 3.5 per cent at this time next year, so we are still looking at 100 basis points of tightening over the next year,'' she said.
Paul Brennan, head of market economics, Citi, agreed the RBA will mostly likely hold off hiking its rates next week.
"It was a good set of numbers, with the headline better than expectations, so the Reserve Bank will be very pleased with these figures, it allows them to continue to pause another month," he said.
Paul Bloxham, a former RBA economist now HSBC's chief economist in Australia, said the central bank will have another close call when its board meets next week, and that a rate rise cannot be ruled out entirely.
The RBA still has ''projections for a very strong looking economy out on the horizon,'' said Mr Bloxham, who was one of a handful of economists to tip the central bank would stay put at its October rates meeting.
Among the triggers for an RBA move are signs of excessive wage rises as jobless numbers fall. Colonial's Mr White said today's inflation figures suggest that salaries are on the increase.
''Tradeable inflation was just 0.2 per cent (in the September quarter), while the non-tradeable sector rose 1.1 per cent suggesting a pick-up in wages is occurring,'' Mr White said.
''This would allow the RBA some cover to raise rates on the back of continued strong employment.''
czappone@fairfax.com.au
BusinessDay, with Reuters, AAP