Australia's core inflation hits 3-1/2-year low, firming July rate cut wagers

Yahoo

18 hours ago

By Stella Qiu
SYDNEY (Reuters) -Australian consumer price inflation slowed more than expected in May, while the closely watched core measure hit three-and-a-half-year lows as investors locked in bets for an imminent rate cut.
Swaps now imply a 90% probability that the Reserve Bank of Australia would cut rates by a quarter-point when it delivers its policy decision on July 8, a day before the expiry of a 90-pause in U.S. reciprocal tariffs on other countries. That was up from 81% before the data.
"We are convinced that the RBA needs to cut in July to safeguard growth as inflation is clearly out of their way now," said Krishna Bhimavarapu, APAC economist at State Street Global Advisors.
"We are tracking faint consumption and growth in Q2, and hence, the bank may do well to frontload the cut to July."
Data from the Australian Bureau of Statistics on Wednesday showed the monthly consumer price index (CPI) rose 2.1% in May compared with a year earlier. That was down from 2.4% in April and under median forecasts of 2.3%.
In the month, CPI fell 0.4% from April as petrol prices eased and housing costs cooled.
Crucially, the trimmed mean measure of core inflation increased at a slower annual pace of 2.4% in May, coming under the mid-point of the 2-3% target band. That was down from 2.8% in April and also the lowest reading since late 2021.
The RBA has cut interest rates twice since February to 3.85% as cooling inflation at home offered scope to counter rising global trade risks. However, the economy barely grew in the first quarter as consumers stayed stubbornly frugal on heightened worries about the economic impact of U.S. tariffs and geopolitical conflicts.
All of that argued for more policy easing from the RBA in the months ahead, with investors expecting a total easing of 78 basis points by the end of the year.
Analysts at TD Securities on Wednesday changed their next rate cut call to July, from August, after the "big downside miss" in the CPI report.
"The RBA's likely comfort on most inflation metrics brings forward our prior Aug and Nov cuts to July and Aug," they said in a note to clients. "We lower the terminal rate from 3.35% to 3.10%."
The labour market has so far stayed resilient. The unemployment rate remains low at 4.1% and job advertisements are stabilising above pre-COVID levels. Wages have been well-behaved, with growth in the private sector mostly subdued.
Wednesday's report showed services inflation slowed to an annual rate of 3.3%, from 4.1% the previous month, while rents rose 4.5%, the lowest annual growth since December 2022.
New dwelling prices were flat in the month, while holiday travel and accommodation prices fell 7% after a 6% rise in April, which was driven by holiday demand.
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