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The Australian dollar climbed to a 28-year high against its US counterpart on Wednesday after an unexpectedly large rise in inflation reinforced expectations the nation’s central bank will resume interest rate hikes later this year.
Headline inflation in the quarter to June of 0.9 per cent pushed the annual rate to 3.6 per cent, with underlying inflation, a measure that strips out volatile price moves, also up 0.9 per cent for an annualised rate of 2.7 per cent.
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Australia joins other countries in the region, including fast-developing nations led by India and China, that are battling to contain inflation. The Reserve Bank of India raised interest rates by 50 basis points this week to help contain pressure on prices.
Paul Bloxham, Sydney-based economist at HSBC, said Australia’s underlying inflation rate was now at the upper end of the central bank’s target inflation band of 2 to 3 per cent.
“In a normal state of the world this would trigger a hike next week, but the world is far from normal,” he said. “Global sovereign debts concerns and weaker domestic sentiment will probably keep the RBA [Australia’s central bank] on the sidelines.” Mr Bloxham says the next rate increase will be made in the fourth quarter but cautions it could come earlier.
Although Australia’s mining, energy and construction sectors are booming on the back of Asian demand for iron ore, coal, and natural gas, three of the nation’s leading exports, other parts of the economy, notably retail, tourism and manufacturing, are struggling under a high Australian dollar and weak consumer spending.
Australia’s 2011 growth forecasts have recently been cut to about 2 per cent after the economy contracted in the aftermath of floods that damaged the mining and agricultural sectors. The weaker growth expectations come amid a fierce debate in Australia about cost of living pressures that has been fuelled by government plans to levy a carbon tax on the nation’s 500 biggest polluters.
But Wayne Swan, Australia’s treasurer, said the country’s growth prospects remained strong and that much of the quarterly rise in inflation could be blamed on a 27 per cent increase in fruit prices as a result of the floods.
“This has been tough on family budgets, but we do know that prices should come down as crops regrow and as farm production comes on,” he said.
Although higher fuel costs also contributed to the inflation numbers, economists noted there had been worrying increases in core expenditure items including furniture and hospital medical services.
Josh Williamson, a Citigroup economist, said rising inflation would hurt the weak parts of Australia’s two–speed economy. “[There is] more pressure on interest rates that will further encourage saving over consumption and more upside to the Australian dollar which will place more pressure on manufacturing and tourism,” he said.
The Australian dollar reached US$1.1063 against the US dollar, its highest level since it was floated in 1983, minutes after the inflation numbers were released by the government.
