Australia core inflation slows enough for markets to rule out rate rise

SYDNEY - Australian consumer price inflation accelerated in the June quarter, but a downside surprise in core inflation led markets to abandon all thought of further rate hikes and wager on an easing as early as November.

Data also showed retail sales topped forecasts in June, but sales volumes for the second quarter still declined, suggesting tight monetary policy is working to constrain consumer demand.

Investors reacted by pushing the Australian dollar 0.7 per cent lower to a three-month low of 64.95 cents. Three-year bond futures rallied hard, up 22 ticks to 96.27. Swaps moved back to pricing in cuts, implying a 50-50 chance for an easing in November.

Data from the Australian Bureau of Statistics on July 31 showed the consumer price index (CPI) rose 1 per cent in the June quarter, matching market forecasts. CPI inflation picked up to 3.8 per cent in the second quarter from a year earlier, up from 3.6 per cent in the first quarter.

For June alone, CPI also rose 3.8 per cent compared with the same month a year earlier.

Most importantly, a closely watched measure of core inflation, the trimmed mean, rose 0.8 per cent in the second quarter from the previous quarter, below forecasts of 1 per cent. The annual pace slowed to 3.9 per cent from 4 per cent, the lowest since early 2022.

“Today’s June quarter CPI data should put to rest the tired notion that the RBA (Reserve Bank of Australia) should lift rates, an act that would do nothing but tempt a recession,” said Deloitte Access Economics partner Stephen Smith.

“Globally, interest rates are falling in many economies that were hit by post-pandemic inflation spikes earlier than Australia. This suggests Australia is a few months behind a global trend of interest rates being reduced from recent highs.”

The

RBA has left interest rates at 4.35 per cent

for five straight meetings, but policymakers were pondering whether the current policy was restrictive enough after earlier inflation data showed limited progress in cooling prices.

The slowdown in underlying inflation is music to the ears of the RBA, as it has been reluctant to hike due to worries of a slump in the labour market. The jobless rate edged up to 4.1 per cent in June, consumers reined in discretionary spending and economic growth came to a virtual halt.

Treasurer Jim Chalmers welcomed the inflation figures.

“Inflation is sticky and stubborn in our economy as it has been for other economies earlier in the year. It’s been more persistent than we’d like, but we have made substantial progress,” Mr Chalmers said at a briefing in Brisbane.

The central bank has raised rates by 425 basis points since May 2022 to tame runaway prices.

The dovish stance from other major central banks is taking off pressure to hike further. The Federal Reserve is widely expected to signal its intention to cut later in the day, while the central banks in Canada, Europe and Switzerland have already eased policy.

“We think the RBA will take some solace from trimmed-mean inflation easing in Q2. Moreover, the Q3 print will be softer due to cost-of-living subsidies announced in the last Budget,” said Oxford Economics Australia head of macroeconomic forecasting Sean Langcake.

“Taking this with the ongoing slowdown in activity indicators, we expect the RBA will keep rates on hold from here.” REUTERS