Australia’s inflation rate rises 0.4%, lowest level since 1999; leaves door open for RBA rate cut

The chances of the Reserve Bank of Australia (RBA) cutting interest rate became higher following the release on Wednesday of the country’s consumer price index (CPI). For the June quarter, the CPI went up only 0.4 percent.

That dragged Australia’s annual inflation rate to 1 percent, the lowest level since 1999, or in 17 years, according to the Australian Bureau of Statistics. It is much lower than RBA’s inflation target band of 2 to 3 percent, reports Sydney Morning Herald.

Price increases were the biggest for healthcare, petrol, tobacco and new home purchase. But domestic holiday travel and accommodation, telecoms and motor vehicle prices showed declines.

Core inflation rate, which removes volatile price swings, averaged 0.45 percent for the quarter and 1.5 percent for the year. It was a bit stronger than economists’ expectations which also suggests the rate reduction is not definite.

Analysts’ expectation of core inflation rate was 1.4 percent, reports ABC. The data caused bets on an RBA key lending rate cut in August to go down to 50-50 percent from the 65-70 percent probability on Monday, futures and money market data from Bloomberg say.

Su-Lin Ong, senior economist of RBC Capital Markets, says the numbers provide the RBA with sufficient reasons to reduce the rates on Tuesday. “The key is obviously the core measures which continue to print at very modest levels averaging a little under a half a per cent for the quarter,” states Ong.

Ong notes the inflation rate is in line with the Australian central bank’s own forecast for the quarter and medium term. “It's enough for them to cut if they want to move next week because it confirms that very benign inflationary environment and outlook and we know that weaker wage and unit labour cost data also supports that. We are sticking with a cut next week,” the senior economist adds.

Tom Kennedy, JP Morgan economist, agrees that the door is “well and truly open for the RBA to cut.”

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Source: https://www.commsec.com.au