Surprise inflation rise reduces chance of more rate cuts

http://www.theguardian.com/world/2014/jan/22/higher-than-expected-inflation-reduces-chance-rate-cuts

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Higher than expected inflation is likely stop the Reserve Bank of Australia from cutting interest rates again, economists say.

The headline measure of inflation, known as the consumer price index (CPI), rose by 0.8% in the December quarter and by 2.7% in the 2013 calendar year.

Both measures were higher than economists' expectations of 0.5% in the December quarter and an annual rate of 2.5%, as holiday and accommodation and fruit and vegetable prices shot up.

Commonwealth Bank of Australia’s chief economist, Michael Blythe, said big increases in fruit and vegetable prices were linked to weather impacts and the weakening Australian dollar was boosting domestic tourism.

"The inflation measures are now in the upper half of the RBA's target range," Mr Blythe said. "Not so long ago they were all hovering around the bottom end of the range.

"We have seen a shift which certainly will cement the idea that the interest rate cut cycle is over."

While the numbers were higher than expected, he said they were still comfortably within the RBA's target range of 2% to 3% inflation and were unlikely to trigger a rate rise in the near future.

"But it does add support to those who believe rates will go up by the end of the year," he added.

The surprisingly strong figures mean the Reserve Bank of Australia is likely to keep the cash rate on hold at 2.5% for longer, National Australia Bank senior economist Spiros Papadopoulos said.

"It's a lot stronger than expected and a lot stronger than what the RBA would have been expecting," Papadopoulos said.

"Given the other activity indicators at the moment, such as retail sales and also what we're seeing with house prices, it's just a further indication that the RBA won't be planning any interest rate cuts in the near term, given that inflation has overshot even their own forecasts for the December quarter.

"But we're still expecting business investment will remain weak and unemployment will keep rising, so while unemployment keeps rising I don't think the RBA will be raising interest rates."