Aussie rates debate intensifies

Australia's consumer prices probably rose at a slower pace in the third quarter, intensifying debate over whether the central bank should resume raising interest rates as wholesale costs climb and employment accelerates.

The consumer price index rose 0.8 per cent in July to September, for an annual gain of 2.9 per cent, according to the median of 24 estimates in a Bloomberg News survey.

The latest index figures are released today by the Bureau of Statistics, six days before Reserve Bank of Australia Governor Glenn Stevens and his board review the overnight cash rate target.

The report may help to sway policy makers who viewed an October 5 decision to hold the benchmark rate at 4.5 per cent as "finely balanced".

A report on Monday showed prices paid to Australian producers rose last quarter by the most in almost two years, prompting traders to boost odds of higher borrowing costs by year-end.

"The RBA probably will be reluctant to pause for too much longer," said Helen Kevans, an economist at JPMorgan Chase in Sydney.

With "the medium-term inflation outlook deteriorating, the argument for further tightening already is strong."

The producer price index advanced 1.3 per cent in the third quarter, more than double the median estimate of a 0.5 per cent gain in a Bloomberg survey of 21 economists.

The data "adds to concerns over the medium-term inflation outlook", Westpac Banking economists said in a research note.

Stevens kept borrowing costs unchanged for a fifth meeting this month, after boosting the benchmark lending rate by 150 basis points from early last October to May this year, from a half-century low of 3 per cent.

Stevens and his board aim to keep inflation in a range of 2 per cent to 3 per cent on average.

Members of Parliament are sensitive about the RBA's rate increases as more than two-thirds of the population own homes, compared with less than 50 per cent in some European nations.

Treasurer Wayne Swan has urged banks not to boost borrowing costs by more than any central bank increases.

The central bank's rate increases have helped to stoke a 10 per cent gain in the nation's currency against the United States dollar this year, the second-best performer among the 16 most actively traded currencies.

Traders are betting there's a 48 per cent chance of a quarter percentage point increase in the benchmark rate to 4.75 per cent next week, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is a 70 per cent chance of a move in December.

"The case to wait before making a tightening move was that the economy was still expected to continue growing at trend in the near term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin," the RBA said in minutes of its October 5 meeting released in Sydney last week.

Inflation was expected to "remain in the target range over the near term" and the currency's rise would "help promote this outcome", the minutes showed.

Core inflation, as measured by the central bank's so-called trimmed mean gauge, probably ran at 2.6 per cent in the third quarter from a year earlier, analysts surveyed by Bloomberg News predict.

"Indeed, excess capacity in the economy is limited and, with the terms of trade soaring and wage pressure building, we believe the RBA probably will be reluctant to pause for too much longer," Kevans said.

- BLOOMBERG