Inflation shock sparks fears on interest rates
The Age
By STEPHEN DABKOWSKI
Thursday 24 January 2002
Interest rates could soon rise after a dramatic and unexpected increase in Australia's inflation rate.
The Consumer Price Index rose 0.9 per cent in the December quarter, almost double the expectation of most economists.
The figures, which the Australian Bureau of Statistics released yesterday, pushed the annual inflation rate from 2.5 per cent to 3.1 per cent, outside the Reserve Bank's 2-3 per cent target range.
The figures suggest further interest rate cuts are now less likely, and that the next move in rates could be up.
"Markets are starting to tinker with the chances of a rate rise by the middle of this year," said ANZ senior treasury economist David de Garis.
"If the economy does continue to build momentum, that will affect inflationary expectations, which lessens the chances of another rate cut."
The inflation rise was attributed to a jump in fruit and vegetable prices as well as the increased cost of taking a domestic holiday, due mostly to the demise of Ansett pushing up airline ticket prices.
Treasurer Peter Costello played down the figures, suggesting they were due to "one-off factors" such as the higher food prices, which were influenced by seasonal factors.
He also indicated the inflation figures did not rule out further rate cuts, suggesting the direction of monetary policy would be determined by the state of the international economy and the possible need to protect the economy from the global downturn.
Mr Costello said the fact that the Australian economy was still growing "should not give us any false sense about the parlous state of the international situation".
He also warned unemployment was likely to rise further. "The unemployment rate is predicted to be a little higher than it currently is during the course of this year," Mr Costello said.
But he said the employment figures would probably improve in the latter part of 2002 and into 2003 as the global economy recovered.
The economic news was not all bad yesterday. The latest update of the Westpac-Melbourne Institute leading index pointed towards continued strong growth through much of the year.
But the inflation figures shook financial markets, pushing bond yields to a four-month high. The 90-day bank bill futures contract - the key indicator of where official rates are likely to be in three months - rose to 4.68 per cent, suggesting that investors see a rate rise by the end of April.
The Australian Chamber of Commerce and Industry warned against an increase in rates, saying it could not be justified in the uncertain economic environment.
"The labour market is flat, domestic investment outside of housing is minimal and much of the world economy is in recession," said the chamber's acting chief executive, Lyndon Rowe.