Inflation set to hit 5%

As the Commonwealth Bank yesterday joined the ANZ and the NAB in trimming its home mortgage rates, new figures showed that costs faced by businesses had soared beyond expectations.

The Producer Price Index went up by 5.6% in the year to September - the biggest rise in a decade since the index was first calculated.

The surprise result prompted economists to lift forecasts for the annual consumer price inflation figure to 5%. But they said the release of the inflation figure tomorrow was unlikely to deter the Reserve Bank from delivering more rate relief as the threat of a global recession becomes clearer.

Commonwealth Securities economist Savanth Sebastian said the central bank believed tomorrow's inflation figures would mark the peak of the cycle, following the collapse of oil prices and the onset of a global slowdown.

Financial markets expect the Reserve Bank to remain focused on the risk of an economic downturn and are pricing in a 92% probability of a further rate cut of half a percentage point at the next board meeting on November 4. Such a cut would take standard variable home loan rates below 8%.

In the meantime, the Commonwealth Bank is set to cut its variable home loan rates by 0.21percentage points and the National Australia Bank by 0.20, following the ANZ's cut of 0.25points last Friday. Westpac is yet to announce a cut.

Adding to the case for a further rate cut is news that China's economic growth rate has fallen to 9% in the year to September, its weakest in five years.

In Parliament, Prime Minister Kevin Rudd said the way that China handled the slump would be important for the world. He was heartened by a statement from the governor of the People's Bank of China, Zhou Xiaochuan, that China would need to boost domestic consumption as its exports fell.

The sharemarket appeared untroubled by yesterday's figures from China, rising by more than 4% despite a weak lead from Wall Street at the weekend.

The S&P/ASX200 index finished up 171.5 points, or 4.32%, at 4142.3 on stronger resource and banking stocks.

Meanwhile, it was revealed yesterday that the Future Fund - set up by the Howard government to provide for Australia's public sector superannuation obligations - had emerged almost unscathed from the recent collapse in share prices.

As members of private super funds typically suffered declines of more than 10% in their savings, the value of the Future Fund fell just 1.8% over three months and 0.2% over the past 15 months.

At the end of September, the Future Fund had a portfolio worth more than $55 billion, plus a stake in Telstra worth about $8.2 billion.

And, with most of its money in cash, it produced an after-fees return of 1.5% in 2007-08, not including its Telstra shares. By contrast, the Victorian Funds Management Corporation's portfolio was down 8.1% over the financial year, and the Queensland Government's QIC ped 6.8% in its diversified growth fund.

Future Fund general manager Paul Costello said that, while it was never pleasing to lose money, he was proud of what had been achieved. "We have worked hard to try to position the fund for future growth without exposing it too much to sharemarket volatility," he said.

About 30% of the Future Fund is invested in Australian and global equities and a further 10% has been lent to banks and put into mortgages. More than 56% of the money is in cash.

Finance Minister Lindsay Tanner said: "This is a very significant and very positive result in the circumstances." With VANESSA O'SHAUGHNESSY, BRENDAN NICHOLSON

5% The figure economists tip inflation to reach, well above the Reserve Bank's comfort zone of between 2% and 3%.

5.6% The figure the Producer Price Index rose by in the year to September.

0.21% The percentage point fall in the Commonwealth Bank's variable interest rate.

0.20% The fall in the National Australia Bank's rate.

0.25% The fall in the ANZ's rate.

The Australian sharemarket closed yesterday at 4142.3, a rise of 171.5 points. The dollar closed at US69.95?.