Australia's producer prices rose by less than forecast last quarter as falls in the price of food and imported electronics helped temper rising fuel and construction costs, taking some steam out of inflation fears.
The Australian dollar fell and bonds pared early losses as Monday's figures showed the price of finished products (PPI) increased by 0.6 percent in the fourth quarter, well below the 1.1 percent rise expected by analysts.
That in turn eased concerns that the consumer price (CPI) report due on Wednesday would show a big enough rise in inflation to prompt another hike in interest rates.
"It was much smaller than expected and materially reduces the risk of a nasty or ugly CPI result," said Matthew Johnson, a senior economist at ICAP. "It slightly trims the probability of
a rate rise in February."
The market had been on alert for a rate rise after Reserve Bank of Australia (RBA) Governor Glenn Stevens last week played down the impact of the global credit crisis and warned that
domestic inflation would be uncomfortably high. Interest rate futures <0#YBA:> had been showing a 50:50 chance of a hike in the RBA's 6.75 percent cash rate at its next meeting on Feb. 5, but that probability fell to 39 percent after the producer price figures.
The low outcome owed much to import prices, which fell 1.4 percent in the fourth quarter thanks to a strong Australian dollar and fierce competition in consumer electronics.
There was also a sharp fall in some domestic agricultural prices, mainly fruit and vegetables.
"That's interesting as it could flow through to the consumer price report," said Brian Redican, a senior economist at Macquarie. "There were bigger increases up the supply chain, which could flow through in time. But this is still the first positive surprise on inflation for a long while," he added.
Not all the news was promising, however. The cost of domestically produced goods and services rose 0.9 percent in the quarter to be up 4.2 percent for the year, driven in large part
by rising construction costs.
"I don't think it really changes the bigger picture view that there are still pressures in the pipeline, cost pressures for businesses, even though it's come in a bit below expectations," said Su-Lin Ong, a senior economist at RBC Capital Markets. "The RBA governor made it very clear that inflation concerns him, and cost pressures are their primary focus, and I don't think there's a lot in this to change that view," she added.
The central bank lifted interest rates twice last year to restrain inflation, but the economy has continued to run hot.
The deciding factor for rates could well be the consumer price (CPI) report for the fourth quarter, due on Wednesday.
A Reuters poll of 24 analysts taken last week produced a median forecast of a 1.0 percent increase in the CPI.
Underlying inflation, which is what policymakers focus on, is seen rising 0.8 percent. That would take average underlying inflation to an annual 3.3 percent, the fastest pace in 16 years
and above the RBA's 2 to 3 percent target zone.
"We expect that a reading of 0.9 percent or above on the core measure will be enough for the RBA to hike interest rates in February," said Helen Kevans, an economist at JPMorgan. "A reading of 0.8 percent would make the February rate decision a closer call although, with inflation set to remain above the RBA's target range in coming quarters, an imminent rate hike appears warranted," she added.