22 January 2003, 09:29  Australia Annual Inflation Rate Slows in 4th Quarter

Sydney, Jan. 22 (Bloomberg) -- Australia's annual inflation rate slowed in the fourth quarter to within the central bank's target range, suggesting its governor Ian Macfarlane will leave interest rates unchanged in coming months. Consumer prices rose 3 percent from a year earlier, down from a 3.2 percent annual increase in the third quarter. Prices rose 0.7 percent in the quarter, matching the increase in the previous three months and the median forecast in a Bloomberg News survey of 22 economists. Bonds rose as investors expect Macfarlane will keep interest rates unchanged now that inflation is within the 2 percent-to-3 percent range the central bank targets, and as a global economic slowdown and the worst drought in a century reduce export earnings.
``The favorable inflation result means that the Reserve Bank has no immediate reason to move interest rates in either direction,'' said Craig James, senior analyst at Commonwealth Securities. ``Rate cuts remain as far off the radar screen as they ever were, but there is no urgency to raise rates.'' The yield on the 6.5 percent bond maturing in May 2013 fell 7 basis points to 5.22 percent at 4:35 p.m. in Sydney, compared with 5.29 percent prior to the report. The Australian dollar was little changed at 58.97 U.S. cents after the report. Fueling inflation in the quarter, vegetable prices increased 5.5 percent and gasoline rose 1.8 percent. Total food prices rose 1.4 percent, the Australian Bureau of Statistics said.
Drought Hits Prices
Drought has slashed wheat, vegetable and milk production, forcing up food prices. Summer crop production is expected to be the lowest level in 20 years, according to the Australian Bureau of Agricultural & Resource Economics. Last week, Goodman Fielder Ltd., Australia's largest bread maker, said higher prices for wheat and other bread-making ingredients cut profits in the current fiscal year. The rise in wheat costs prompted Goodman Fielder to raise its bread prices last year. Still, Woolworths Ltd.'s Chief Executive Roger Corbett expects food-price inflation to slow this year once the drought breaks. Food prices will rise between 1.5 percent and 2.5 percent in 2003, he said. ``It will depend on how the drought breaks,'' Corbett said. ``Most people will really need rain in March and April, and there's every indication that could occur.''
Central Bank Meeting
Tempering the rise in food prices, stereos, televisions and computer prices dropped 5 percent in the fourth quarter. Meantime, Australia's central bank board next meets on Feb. 4 and 21 of 22 economists polled last week by Bloomberg News expect it to keep the cash rate target unchanged at 4.75 percent, with the median forecast for a rate increase in the second half of this year. The bank has kept borrowing costs unchanged since July as the faltering global recovery cuts export earnings. The economy has been growing almost 4 percent annually, fueled by higher consumer spending and a housing boom. Were it not for a drought and weaker growth in the U.S. and Japan, Australia's largest trading partners, the central bank would have increased interest rates, economists said. When global risks fade, ``say around mid-year, we expect the Reserve Bank to raise rates by 50 basis points,'' said Annette Beacher, an economist at Salomon Smith Barney/Citibank Ltd. Today's figures showed market prices, excluding volatile items, which are a measure of core inflation, rose 0.6 percent in the fourth quarter. They were 2.4 percent higher than a year earlier. //www.quote.bloomberg.com

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