Australian inflation eases, bolstering case for rate pause

AUSTRALIAN inflation decelerated more than expected in February, driven by an easing in housing construction costs, bolstering the case for the Reserve Bank of Australia (RBA) to stand pat at next week’s policy meeting.

The consumer price indicator (CPI) advanced 6.8 per cent from a year earlier, down from 7.4 per cent in January and compared with a forecast 7.2 per cent increase, Australian Bureau of Statistics (ABS) data showed on Wednesday (Mar 29). Excluding fruit, vegetables and fuel, annual CPI rose 6.9 per cent in February, slowing from 7.5 per cent a month earlier.

The increased likelihood of a rate pause prompted a selloff in the currency which briefly fell below 67 US cents, and three- and 10-year government bond yields declined. Australia’s benchmark stock index, in contrast, swung from losses to a gain following the release.

“Markets were already quite convinced with the story of an April pause, given what’s happening globally. But this just adds to the story,” said Jessica Ren, a strategist at Westpac Banking in Sydney. Recent comments from RBA policymakers had been implying “get ready for a pause”.

The report is the final piece of the puzzle for the central bank ahead of its Apr 4 policy meeting as the board assesses the economy’s outlook after 10 consecutive rate hikes. With the cash rate now at 3.6 per cent, consumer spending is also slowing, employment showing signs of easing and business surveys are pointing to weaker conditions.

The RBA will welcome the inflation result, while likely retaining a tightening bias given consumer-price growth is still well above the central bank’s 2-3 per cent target. The RBA has raised rates by 3.5 percentage points since May and recently signalled the possibility of a pause, citing lags in policy transmission and a desire to engineer a soft landing in the economy.

New dwellings advanced 13 per cent in the 12 months to February, which was the lowest annual growth since February 2022 as price rises for building materials continue to ease, the ABS said.

Even so, housing led contributors to the annual increase in the February monthly CPI indicator, followed by food and non-alcoholic beverages and transport, the bureau added.

The statistics bureau has paused its monthly trimmed mean series, saying the data wasn’t proving reliable.

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Policymakers and economists have urged caution in reading too much into the monthly figures as not all items in the CPI basket are updated, meaning it has some deficiencies relative to the longstanding quarterly gauge.

“The ABS is continuing to improve the monthly CPI indicator where possible and has added a new monthly series for electricity prices into the indicator,” Michelle Marquardt, head of Prices Statistics, said in a statement. “This new series showed that electricity prices rose 17.2 per cent for the year to February.” BLOOMBERG