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Australia's inflation at 17-year low, opens door to rate cut

[SYDNEY] Australian consumer prices rose at the slowest annual pace since 1999 last quarter while core inflation stayed at a record trough, leaving the door open to a cut in interest rates as early as next week.

The headline CPI index rose just 1.0 percent in the year to June, while key measures of underlying inflation held at 1.5 per cent, all well below the Reserve Bank of Australia's (RBA) target band of 2 to 3 per cent.

The central bank had already cut rates to an all-time low of 1.75 per cent in May following an alarmingly weak inflation report for the first quarter. Many analysts now looked for a repeat performance at the RBA's next meeting on Aug 2.

"We think that this print is low enough to see the RBA provide a bit more support to the economy," said Tom Kennedy, an economist at JPMorgan. "For us, this is definitely consistent with the idea that the cash rate needs to go lower."

Investors were a little less sure and slightly lengthened the odds of a cut next week to 50 per cent: , from 60 per cent ahead of the data. A move is still fully priced in by November.

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Yields on three-year government paper stood at 1.56 per cent, well under the overnight rate, while the local dollar was little changed at US$0.7515.

The Australian Bureau of Statistics reported its headline consumer price index (CPI) rose 0.4 per cent last quarter, from the fist quarter when it fell 0.2 per cent.

The biggest price gains came for healthcare, petrol, tobacco and new home purchases. That was balanced by falls in domestic holiday travel and accommodation, motor vehicles and telecoms.


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