Australia’s Q2 inflation surprises on low side, heralds rate cut
[SYDNEY] Australian consumer prices grew at the slowest pace in over four years in the June quarter, data showed on Wednesday, while core inflation hit a fresh three-year low and cemented market wagers for a cut in interest rates next month.
The surprisingly benign report will be a huge relief to the board of the Reserve Bank of Australia which paused its easing cycle this month on concerns core inflation would not cool as much as hoped, a shock decision that badly wrong-footed markets.
“We believe that the board now has the confirmation it needs to continue on its ‘cautious’ – if not so predictable – path of removing current monetary restrictiveness,” said Luci Ellis, chief economist at Westpac.
“We therefore expect it to cut rates by 25 bps at its August meeting,” she added. “Further cuts in November, February 2026 and May 2026, also look increasingly likely.
Markets now imply a near-100 per cent chance the RBA will cut its 3.85 per cent cash rate by a quarter point when it meets on Aug 12, and continue easing to 3.10 per cent or lower by year-end.
With a cut long priced in, the data did little damage to the Australian dollar which held at US$0.6512.
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The report certainly supported the doves as the main trimmed mean measure of core inflation rose 0.6 per cent in the June quarter, below forecasts of 0.7 per cent. That took the annual pace to 2.7 per cent, down from 2.9 per cent in the March quarter and nearer the mid-point of the RBA’s target band of 2 per cent to 3 per cent.
This underlying measure is favoured by policy makers as it strips out volatile one-off shifts in prices.
The headline consumer price index rose 0.8 per cent in the quarter, nudging the annual pace down to 2.1 per cent from 2.4 per cent, the lowest reading in more than four years.
This measure has been held down by government rebates on electricity and child care, which will soon drop out of the series and likely see the CPI temporarily rise back toward 3 per cent.
A monthly measure of the CPI actually showed annual price growth dropped to just 1.9 per cent in June, putting it under the RBA’s target band.
Details of the report showed the largest price gains in the June quarter came in clothing, electricity and health care, but gains elsewhere were much more modest.
Crucially for the RBA, the cost of new housing eased markedly as project home builders responded to subdued demand with incentives and promotional offers.
Annual inflation in new dwellings slid to just 0.7 per cent in the second quarter, from 1.6 per cent the previous quarter and a top of almost 21 per cent back in 2022.
There was also a welcome slowdown in the services sector, which has proved more stubborn than for goods which are open to international competition. Annual services inflation dropped to 3.3 per cent in the June quarter, led by rents and insurance.
The cool down has been helped by a pullback in wage growth and a loosening in the labour market, where the jobless rate hit a 3-1/2 year high of 4.3 per cent in June. REUTERS
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