© Reuters. FILE PHOTO: View of a construction site for a train station on the Sydney Metro, Australia July 22, 2021. REUTERS/Sam Holmes
By Stella Qiu
SYDNEY (Reuters) -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% chance of a quarter-point hike, compared with 50% before the data.
Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 0.8% in the second quarter from the first, the smallest gain since the third quarter of 2021 and under market forecasts of 1.0%. In the first quarter, inflation was at 1.4%.
The annual pace slowed to 6.0%, from 7.0%, and was again below forecasts of 6.2%. For June alone, the CPI rose 5.4% year-on-year, down from 5.5% in May.
A closely watched measure of core inflation, the trimmed mean, rose 0.9% in the June quarter, pushing the annual pace down to 5.9% and just under forecasts of 6.0%.
The Australian dollar tumbled as much as 0.9% but recovered some of the losses and was last down 0.4% at $0.6765. Three year bond futures gained 5 ticks to 96.09. Markets are now seeing rates peaking at 4.32% by the end of the year, down from 4.42% before the data release.
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% 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% from 7.6% 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% 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% 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.
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