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Australia CPI data seen as prelude to rate rise

SYDNEY: Higher building costs and fuel prices have probably pushed Australian inflation back up to two percent for the first time in three years, setting the scene for a February rate rise.

A Reuters survey found the Consumer Price Index for the December quarter is expected to rise 0.8 percent, taking the annual inflation rate to 2.0 percent, the bottom of the central bank's two to three percent target band.

The official report is due on Friday, January 28.

The index, the key gauge of price pressures in the economy, would have to stray dramatically from forecasts to change expectations for a further interest rate rise after the Reserve Bank of Australia board meets on February 1.

"The CPI would have to be a very low number to dampen that rate rise sentiment," said Commonwealth Bank senior research economist Michael Blythe. "If it was higher, then speculation about a 50 basis point rise could emerge again."

By a small majority, analysts expect the Reserve Bank to stick to its recent habit of moving in small increments of 25 basis points.

But some believe the bank will move more decisively with a 50 basis point rise after its February meeting, given the clear strength of the economy over the Christmas/New Year period.

The official cash rate was raised for the first time in almost five years on November 3, with a quarter-point move taking the cash rate to 5.0 percent.

While there are no signs of any inflationary breakout and wage rises remain modest, the RBA is keen to keep the lid on price pressures ahead of the introduction of the 10 percent Goods and Services Tax (GST) on July 1. It has said any second-round price or wage increases will trigger further rate rises.

Rates are seen peaking at 6.0 percent around mid-year.

A BIGGER TAP ON THE BRAKES?

Monetary policy is still adding stimulus to a robust economy that has shown no inclination to slow down.

"A quarter-point move to 5.25 would still be akin to driving downhill with the accelerator on," said Colonial State Bank chief economist Craig James, arguing for a point rise.

Retailers said the last rate rise failed to change consumer behaviour, with retail spending over the Christmas period likely to top A$15 billion (US$10 billion) for the first time.

"And you're not going to get a change in behaviour unless the rate hike has real teeth in cutting into household spending decisions," said James.

Others believe that because the inflationary outlook is not threatening, with underlying inflation to stay below three percent even after the GST is introduced, the Reserve Bank has no need to slam on the brakes.

A building boom was seen pushing up the cost of construction materials and labour in the December quarter, while petrol prices contributed to a small increase in transport costs.

Cigarette prices also rose in November after tax rules were changed, with Phillip Morris citing a six percent rise.

But those factors will be partly offset by a new round of car discounting during the quarter, and business surveys continue to show price pressures remain muted.-Reuters