Slowing Australia Q2 inflation lessens rate hike pressure
AUSTRALIAN inflation slowed more than expected in the second quarter thanks to falls in the cost of domestic holidays and petrol, suggesting less pressure for another hike in interest rates and sending the local dollar sharply lower.
Investors reacted by lengthening the odds on the Reserve Bank of Australia (RBA) increasing rates at its meeting next week, with futures now pricing in a 31 per cent chance of a quarter-point hike, compared with 50 per cent before the data.
Data from the Australian Bureau of Statistics (ABS) on Wednesday (Jul 26) showed the consumer price index (CPI) rose 0.8 per cent in the second quarter from the first, the smallest gain since the third quarter of 2021 and under market forecasts of 1.0 per cent. In the first quarter, inflation was at 1.4 per cent.
The annual pace slowed to 6.0 per cent, from 7.0 per cent, and was again below forecasts of 6.2 per cent. For June alone, the CPI rose 5.4 per cent year-on-year, down from 5.5 per cent in May.
A closely watched measure of core inflation, the trimmed mean, rose 0.9 per cent in the June quarter, pushing the annual pace down to 5.9 per cent and just under forecasts of 6.0 per cent.
The Australian dollar tumbled as much as 0.9 per cent but recovered some of the losses and was last down 0.4 per cent at US$0.6765. Three-year bond futures gained 5 ticks to 96.09. Markets are now seeing rates peaking at 4.32 per cent by the end of the year, down from 4.42 per cent before the data release.
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Robert Carnell, Asia-Pacific head of research at ING, said the outlook for July consumer prices were also favourable, but that it would be harder for inflation to keep slowing beyond this month and a hike in September looks probable.
“This favourable run of events, absent any unforeseen supply shocks, should help to keep policy rates on hold for a few meetings. But thereafter things become trickier,” said Carnell.
Indeed, services inflation, which policymakers have feared would be sticky, accelerated to a fresh 22-year high of 6.3 per cent in the second quarter on higher rents, restaurant meals, childcare costs, the ABS data showed.
Rent inflation recorded the strongest quarterly rise since 1988, driven by low vacancy rates amid strong housing demand.
That was balanced by a sharp fall in goods inflation, which slowed to an annual rate of 5.8 per cent from 7.6 per cent the quarter before.
Adelaide Timbrell, senior economist at ANZ, said both headline and trimmed mean inflation are tracking below the RBA’s forecast for the second quarter. ANZ’s view is that the cash rate has peaked.
“(The data) highlight that a 4.1 per cent cash rate may be restrictive enough to bring inflation down. This is particularly the case given monetary policy operates with a considerable lag.”
However, headline inflation remains far above the RBA’s target band of 2-3 per cent and it is only projected to return to the top of the bank’s target by mid-2025. The RBA will release its updated economic forecasts next week.
Moreover, the labour market has remained drum-tight, defying a whopping 400 basis point increase in rates so far, with the economy adding more jobs than expected in June and the jobless rate staying near 50-year lows.
The RBA has warned that some further tightening may be required to bring inflation to heel. REUTERS
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