Australia core inflation slows enough for markets to rule out rate rise
Australia Q2 CPI +1.0% q/q, +3.8% y/y, as expected
Core inflation slows a tad, welcome news for RBA
Markets give up rate hike wagers, back to pricing in cuts
Adds analysts' comments in paragraphs 7-8 and 15-16, Treasurer's comment in paragraphs 11-12
SYDNEY, July 31 (Reuters) -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 AUD=D3 0.7% lower to a three-month low of $0.6495. Three-year bond futures YTTc1 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. 0#RBAWATCH
Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 1.0% in the June quarter, matching market forecasts. CPI inflation picked up to 3.8% in the second quarter from a year earlier, up from 3.6% in the first quarter.
For June alone, CPI also rose 3.8% compared to the same month a year earlier.
Most importantly, a closely watched measure of core inflation, the trimmed mean, rose 0.8% in the second quarter from the previous quarter, below forecasts of 1.0%. The annual pace slowed to 3.9% from 4.0%, the lowest since early 2022.
"Today's June Quarter CPI data should put to rest the tired notion that the RBA should lift rates, an act that would do nothing but tempt a recession," said Stephen Smith, a partner at Deloitte Access Economics.
"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 Reserve Bank of Australia has left interest rates at 4.35% 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% 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," 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 Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.
"Taking this with the ongoing slowdown in activity indicators, we expect the RBA will keep rates on hold from here."
Reporting by Wayne Cole and Stella Qiu; Editing by Shri Navaratnam, Edwina Gibbs and Sonali Paul
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