Australia's Q2 inflation surprises on low side, heralds rate cut
The surprisingly benign report will be a huge relief to the board of the Reserve Bank of Australia which paused its easing cycle this month on concerns core inflation would not cool as much as hoped, a shock decision that badly wrong-footed markets.
"We believe that the board now has the confirmation it needs to continue on its 'cautious' - if not so predictable - path of removing current monetary restrictiveness," said Luci Ellis, chief economist at Westpac.
"We therefore expect it to cut rates by 25 bps at its August meeting," she added. "Further cuts in November, February 2026 and May 2026, also look increasingly likely".
Markets now imply a near-100% chance the RBA will cut its 3.85% cash rate by a quarter point when it meets on August 12, and continue easing to 3.10% or lower by the end of the year.
The report certainly supported the doves as the main trimmed mean measure of core inflation rose 0.6% in the June quarter, below forecasts of 0.7%.
That took the annual pace to 2.7%, down from 2.9% in the March quarter and nearer the mid-point of the RBA's target band of 2% to 3%.
This underlying measure is favoured by policy makers as it strips out volatile one-off shifts in prices. The headline consumer price index rose 0.8% in the quarter, nudging the annual pace down to 2.1% from 2.4%, the lowest reading in more than four years.
This measure has been held down by government rebates on electricity and child care, which will soon drop out of the series and likely see the CPI temporarily rise back toward 3%.
A monthly measure of the CPI actually showed annual price growth dropped to just 1.9% in June, putting it under the RBA's target band.
Details of the report showed the largest price gains in the June quarter came in clothing, electricity and health care, but gains elsewhere were much more modest.
Crucially for the RBA, the cost of new housing eased markedly asproject home builders responded to subdued demand with incentives and promotional offers.
Annual inflation in new dwellings slid to just 0.7% in the second quarter, from 1.6% the previous quarter and a high of almost 21% back in 2022.
There was also a welcome slowdown in the services sector, which has proved more stubborn than for goods which are open to international competition. Annual services inflation dropped to 3.3% in the June quarter, led by rents and insurance.
The cool down has been helped by a pullback in wage growth and a loosening in the labour market, where the jobless rate hit a three and a half year high of 4.3% in June.
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