SYDNEY (XFN-ASIA) - A rise of less than 3 pct in Australia's consumer price index (CPI) for the March quarter rules out chances of a near-term interest rate hike and has sent the Australian dollar lower, economists and dealers said.
They said the headline rate of a 0.1 pct rise in the March quarter to make a 2.4 pct year-on-year increase was less than expected and means the annual inflation rate falls with the Reserve Bank of Australia's (RBA) target range of 2-3 pct.
The Australian Bureau of Statistics released the first quarter inflation data this morning, prompting a sell-off in the Australian dollar as the market reduced expectations of an interest rate rise this year.
Economists had tipped a 0.6 pct quarter-on-quarter rise, making an annual rise of 3.0 pct.
In the December quarter the headline CPI rose 3.3 pct year-on-year.
While the headline rate was influenced by a sharp fall in banana prices, which spiked higher last year when a cyclone destroyed most of the Australian crop, the central bank is likely to take more note of its preferred measure of inflation, the trimmed mean CPI.
This underlying measure of inflation rose 0.5 pct in the first quarter from the final quarter of 2006 and was up 2.7 pct year-on-year.
The RBA holds its monthly policy meeting on Tuesday, May 1, but economists said it has no reason to raise the rate beyond 6.25 pct, a level it has maintained since a 25 basis points hike in November last year.
HSBC Australia and New Zealand chief economist John Edwards said his firm's view is that interest rates will remain on hold this year though price pressures could build, increasing the case for a rate hike later in the year.
'If business investment remains firm, exports pick up strongly, residential construction comes back, and household spending growth accelerates, then further tightening is inevitable,' he said.
CommSec chief economist Craig James observed the RBA noted in late February that it had become more confident on the inflation outlook and he said that confidence has been entirely justified.
'Inflation is back firmly in the 2-3 pct target band, and more importantly it's set to stay there courtesy of a higher Australian dollar pushing down prices of imported goods in coming months,' James said.
Nevertheless, the Australian dollar fell after the data's release after having been pushed to 17 year highs against the US dollar on expectations of an a widening interest rate differential with the US.
While analysts have been forecasting rate cuts in the US, in Australia some were anticipating a May rate increase -- before the release of today's data.
The Australian dollar fell to 0.8282 usd from 0.8324 immediately after the data was released.
Commonwealth Bank of Australia senior currency strategist Richard Grace said his firm is not turning bearish on the Australian dollar as there are more fundamental factors at work supporting the currency than the chance of an interest rate rise soon.
Grace said these factors include a robust domestic economy, firm commodity prices, high terms of trade and a softer US dollar.
He said the currency may come under more downward pressure on the cross-rates than against the US dollar.
'The exchange rate likely to come under the most near-term downward pressure is the Australian dollar/British pound, because of the near-term Bank of England interest rate rise likely to take place on May 9,' Grace said.
He said there is a risk that Britain's central bank may hike its rates 50 basis points to 5.75 pct, not just 25 basis points.
At 3.20 pm, here, the Australian dollar was at 0.8253 usd.
bruce.hextall@xfn.com