RESERVE Bank of Australia officials are breathing a sigh of...

RESERVE Bank of Australia officials are breathing a sigh of relief today after the country’s inflation rate rose by less than expected over the first three months of the year.

Australia’s annual inflation rate has increased to 2.9 per cent, near the top of the Reserve Bank’s target range, but consumer prices rose only 0.6 per cent over the three months to March, compared with 0.9 per cent the previous quarter.

The updated inflation figures will end speculation the Reserve Bank might increase official interest rates later this year: the Australian dollar fell more than half a US cent on the news to US93.10c as economists had been expecting a sharper rise in prices in keeping with the quicker than expected rise in the lead up to Christmas.

“This will allow the Reserve Bank’s board to continue to pursue the current very accommodative setting of monetary policy to buttress the economy from the expected drag on growth from weaker mining investment and tighter fiscal policy,” said ANZ economist Riki Polygenis.

“It suggests the period of stability in the Australian official interest rate can continue for some time further,” she added.

Increases in the cost of education, petrol and cigarettes (thanks to scheduled rise in tobacco excise) underpinned the overall increase in consumer prices, partly offset by falls in the cost of domestic and international holidays (down by 2.4 per cent), motor vehicle repairs (down 3.3 per cent) and furniture (down 4.4 per cent).

Underlying inflation, which strips out volatile items and is more closely monitored by the Reserve Bank, also rose by 0.6 per cent over the three months to bring the annual rate to 2.7 per cent.

“This does not suggest an intensification in the pace of currency pass-through or a widening of retail margins in the quarter, which will be of comfort to the RBA,” Ms Polygenis said.

Electricity prices rose 1.4 per cent and rents by 0.7 per cent, to finish the 12 months period 5.2 per cent and 2.9 per cent higher, respectively.

Economists had been concerned about mounting inflation after a sharp rise in the annualised rate of inflation to almost 4 per cent in the lead up to Christmas.

http://www.theaustralian.com.au/business/economics/australian-dollar-falls-as-inflation-rate-soft-at-29pc/story-e6frg926-1226893233335