Australia inflation slows enough for markets to rule out rate rise

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 by the year end.

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 0.7 per cent lower to a three-month low of $0.6495. Three-year bond futures rallied, up 23 ticks to 96.28. Swaps moved back to pricing in cuts, implying a 70 per cent chance for an easing in December.

Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 1.0 per cent in the June quarter, matching market forecasts. CPI inflation picked up to 3.8 per cent from a year earlier, up from 3.6 per cent in the first quarter.

For June alone, consumer price index also rose 3.8 per cent compared to the same month a year earlier.

Most importantly, a closely watched measure of core inflation, the trimmed mean, rose 0.8 per cent in the second quarter from the previous quarter, below forecasts of 1.0 per cent. The annual pace slowed to 3.9 per cent from 4.0 per cent, the lowest since early 2022.

“Today’s June Quarter consumer price index data should put to rest the tired notion that the Reserve Bank of Australia (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 per cent 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 per cent 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 June quarter report showed housing and food prices were the main drivers of inflation. Rents increased 2 per cent in the quarter, while prices for fruits and vegetables jumped 6.3 per cent due to unfavourable growing conditions.

Analysts expect new government electricity rebates will materially lower the headline inflation rate from the third quarter this year, taking the pressure from the RBA to hike further.

The dovish stance from other major central banks also argues for no more hikes. The US 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.

George Tharenou, UBS’ Chief Economist for Australia, removed his call for an August rate rise after the data.

“Given we expect additional fiscal stimulus in the lead up to the Australian Government election, we still expect the RBA to keep rates ‘higher-for-longer’, he said, with the expectation for a first rate cut of 25 basis points expected in August 2025.

Meanwhile Australian retail sales enjoyed a rare bounce in May as discounting and early sales events tempted consumers who were otherwise struggling with stubborn inflation and painfully-high mortgage rates.