SYDNEY, July 24: Australian inflation was generally benign last quarter thanks to falling costs for petrol and holidays, leaving the door open for another cut in interest rates next month should policy makers decide the economy needs an extra fillip.
The Australian Bureau of Statistics estimated the headline consumer price index (CPI) rose a modest 0.4 percent in the second quarter from the first, to be up 2.4 percent for the year.
However, key measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) rose by 0.6 percent on average in the quarter, a tick above forecasts.
The slightly mixed message left the market almost evenly divided on whether the RBA would cut rates next month, with swap rates putting the probability at 56 percent.
The split was reflected in analysts’ views.
‘It has made the RBA call a little bit difficult because inflation does look a touch higher and employment is trending up at the moment, so it will be the usual delicate balancing until they meet in a couple of weeks time,’ said Michael Blythe, chief economist at Commonwealth Bank.
The central bank’s next policy meeting is on August 6. It last cut in May, taking the cash rate to a record low of 2.75 percent and has been on hold since to gauge the impact of past easing.
Yet an annual pace of underlying inflation of 2.4 percent was comfortably within the RBA’s long-term target band of 2 to 3 percent and thus no obvious impediment to a move.
Growth in the Australian economy slowed to 2.5 percent in the year to March, well short of the 3.25 to 3.5 percent pulse the country has become used to.
‘The overall story is that it confirms inflation remains very contained in Australia at the moment,’ said Brian Redican, a senior economist at Macquarie.
‘If the RBA thinks the economy needs a stimulus hit, these data are completely consistent with that. Our view is that growth is slowing in the economy. So we would expect the RBA to cut rates in August.’
The reaction in financial markets was complicated by a surprisingly soft report on Chinese manufacturing which only added to worries about a slowdown in what is Australia’s single biggest export market.
Thus while the local dollar initially firmed to $0.9320 on the inflation numbers, it quickly retreated to $0.9269 when the Chinese news hit dealing screens.
The outlook for inflation has also been complicated by the fall in the Australian dollar in the past few months which will likely jolt import prices higher over time.
The currency has dropped around 11 percent in trade weighted terms since April, which research suggests could add perhaps a percentage point to consumer price inflation over a three year period, though underlying inflation would be less affected.
The impact was acknowledged by the RBA in minutes of its July policy meeting which showed its outlook for inflation was ‘slightly higher’ because of the drop in the dollar.
The high currency had played a major role in pulling down tradable prices, those that are set mainly by international forces. That was important as it offset stubbornly high inflation in the non-tradables sector, mostly emanating from the services industry.
Thus while tradable prices fell 0.7 percent in the year to June, non-tradable inflation was all the way up at 4.3 percent.
Policy makers have been counting on slowing wage pressures, improving productivity and intense competition at the retail level to temper this trend.
(agencies)
Follow our WhatsApp channel