Australia's inflation rate gained more than economists forecast last quarter, prompting investors to scrap bets on an interest-rate cut this quarter and driving up the nation's currency to a record.

The consumer price index rose 0.9 percent in the three months through June from the prior quarter, led by costlier food, clothing and health care, the Bureau of Statistics said in Sydney today. That exceeded the 0.7 percent median estimate in a Bloomberg News survey of 25 economists. Prices advanced 3.6 percent from a year earlier, more than economists' 3.4 percent forecast and the biggest annual gain since 2008.

The report reflects lingering effects of floods and a cyclone that shut mines and ruined crops in the northeast, with the cost of bananas soaring 138 percent. The currency surged as traders wagered for the first time in six weeks on a chance that Reserve Bank of Australia Governor Glenn Stevens will resume tightening policy, ending his longest rate pause since 2007.

"It's a firm number," said Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney who correctly predicted the quarterly figure. "The RBA is always going to be uncomfortable when it comes in above forecast -- even though there are flood effects still seeping through -- and it certainly strengthens the case for a rate increase."

RBC Capital predicts the central bank will raise borrowing costs in the fourth quarter, Turner said.

Eoin Treacy's view While in Australia in May, most people I talked to opined that the RBA had raised short-term interest rates too far too quickly. They mostly believed that a pause was warranted and potentially a rate cut because of the difficulties experienced by the tourist industry and other areas of the domestic economy. However, global commodity prices remain a source of inflationary pressure, wage demands remain a factor in Australia and the negative repercussions of the floods are also still a burden.

At 4.75% the RBA Target Rate is still at a level which would once have been considered accommodative. However, the spread between the US Fed Funds Rate and the RBA Cash Rate is currently 4.5% which is on par with some of the highest spreads seen in the last 20 years. Therefore it would be fair to say that rates are already at level which could be considered a headwind for the economy. The contraction of the Australian yield curve spread from 177 basis points in 2009 to the current 49 basis points highlights this point.

Australian 10-year yields at only 25 basis points more than the RBA rate appear to reflect a heightened desire for security from a country with one of the world's strongest currencies compared to the US Dollar. The 10-year yield is now retesting the 5% level, having posted a succession of lower rally highs since February. A clear upward dynamic and sustained move above 5.3% will be required to confirm support in this area.

The Australian Dollar is attractive to many investors because it is at least partially supported by the commodity export sector and offers a compelling yield. Today's breakout against the US Dollar is probably as much about the US Dollar's weakness as it is about the Australian Dollar's strength. While some consolidation of recent gains in the region of A$1.10 is possible, a sustained move below A$1.075 would be required to question potential for some additional upside.

Longer-term, the Australian Dollar last traded above parity for a sustained period during the commodity secular bull market of the 1970s. Nothing has happened to question potential for an eventual retest of the highs near A$1.40 at some point before the current secular bull market ends.

Gold in Australian Dollars has held its progression of higher major reaction lows over last six years and a sustained move below A$1400 would now be required to begin to question medium-term upside potential.