Australian consumer prices rose less than forecast last quarter, driving down the nation’s currency as traders unwound bets the central bank will raise interest rates next week. The consumer price index rose 0.7 percent from the second quarter, the Bureau of Statistics said in Sydney today. That was less than the 0.8 percent median estimate in a Bloomberg News survey of 24 economists. The central bank’s measures of core inflation showed annual price increases slowed last quarter. The currency plunged 1.2 percent on speculation slowing inflation will allow Reserve Bank of Australia Governor Glenn Stevens to keep rates unchanged Nov. 2. Expectations of a rate rise had mounted after minutes of this month’s meeting said the decision to leave rates steady was “finely balanced” with the case for an increase. “The Reserve Bank will be hard-pressed to justify a rate hike next week,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “The good inflation numbers have justified the decisions to leave rate settings on hold over the past few months.” The Australian dollar slid to 97.36 U.S. cents as of 4:25 p.m. in Sydney from 98.59 cents just before the report. The currency reached parity with the U.S. dollar on Oct. 15 for the first time since 1983, partly on expectations of an increase in borrowing costs. Fed’s Policy The U.S. Federal Reserve has kept its benchmark interest- rate near zero since December 2008 and announces its next policy move the day after the RBA’s decision next week. A Credit Suisse AG index based on swaps trading today showed there was a 16 percent chance that Stevens would increase borrowing costs by a quarter-percentage-point to 4.75 percent next week compared with 52 percent two days ago. Today’s report showed core inflation, as measured by the central bank’s so-called trimmed mean gauge, rose 0.6 percent from the previous quarter and 2.5 percent from a year earlier. Both gauges were below economists’ median estimates. The weighted-median gauge of inflation advanced 0.5 percent in the third quarter for an annual increase of 2.3 percent. Economists forecast a quarter-to-quarter gain of 0.7 percent and annual rose of 2.6 percent. Both of the RBA inflation measures were near the mid-point of the central bank’s 2 percent to 3 percent target range. 2.8% Gain Consumer prices advanced 2.8 percent in third quarter from a year earlier, less than economists’ estimates and slower than a 3.1 percent annual rise in the April-June period, the report showed. “Today’s inflation numbers must have been music to the Reserve Bank staff’s collective ears,” said Paul Bloxham, chief economist for Australia and New Zealand at HSBC Holdings Plc in Sydney and a former RBA official. “Inflation is now firmly back in the RBA’s target band, with three of the past four quarterly readings in the comfort zone.” The strength of the economy means a rate increase next week is probably more likely than the market is showing, though the central bank may wait to see domestic data next month, said Su- Lin Ong, senior economist at RBC Capital Markets in Sydney. “The current pace of inflation remains moderate despite strengthening growth, soaring terms of trade, and an increasingly tight labor market,” she said. “We are also mindful that the rest of the domestic data over the last month have mostly been on the stronger side of expectations.” Health, Housing Today’s report showed health costs fell 0.7 percent in the third quarter, transportation expenses dropped 0.6 percent and the price of food declined 0.5 percent. By contrast, alcohol and tobacco rose 3.1 percent, and housing increased 2.3 percent. Electricity prices gained 6 percent. Stevens kept borrowing costs unchanged for a fifth meeting this month, after boosting the benchmark lending rate by 150 basis points from early October 2009 to May this year, from a half-century low of 3 percent. The third-quarter inflation picture “provides some vindication for the RBA’s wait-and-see approach at the October board meeting,” Bloxham said. Companies such as BHP Billiton Ltd. and Rio Tinto Group have helped spur a hiring boom as they increase shipments of iron ore and coal to China. Australia’s jobless rate of 5.1 percent is nearly half the U.S. level of 9.6 percent. Trade Windfall The nation’s terms of trade, a measure of income earned from exports, are near a 60-year high, and Stevens this week cited soaring prices in previous booms to underscore the bank’s inflation target range. Data released this week showed prices paid to Australian producers rose 1.3 percent in the third quarter, the most in almost two years, and an Oct. 7 report revealed that full-time employment in the past two months had its biggest back-to-back increase since 1988. Central bank Deputy Governor Ric Battellino said this month that economic growth in Australia is expected to pick up from its current rate of about 3.25 percent to closer to 4 percent “over the next couple of years.” Gross domestic product expanded 3.3 percent in the second quarter from a year earlier, the biggest gain since 2008, a report showed last month. Australia’s GDP per capita this year is the highest of any nation in the Asia-Pacific region, according to the International Monetary Fund. To contact the reporter for this story: Michael Heath in Canberra at heath1@bloomberg.net. To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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