Australia’s Inflation Slowdown Paves the Way for Possible Rate Cut, According to Reuters

By Wayne Cole

SYDNEY – Consumer prices in Australia increased at their slowest annual rate since 1999 in the last quarter, while core inflation remained at a record low. This development could lead to a reduction in interest rates as soon as next week.

The headline Consumer Price Index (CPI) recorded a modest rise of just 1.0 percent in the year up to June, while key underlying inflation metrics held steady at 1.5 percent—both figures well below the Reserve Bank of Australia’s (RBA) target range of 2 to 3 percent.

Following a concerning inflation report for the first quarter, the central bank had already reduced rates to an unprecedented low of 1.75 percent in May. Many analysts now anticipate a similar action at the RBA’s upcoming meeting on August 2.

According to Tom Kennedy, an economist at JPMorgan, "We think that this print is low enough to see the RBA provide a bit more support to the economy." He emphasized, "For us, this is definitely consistent with the idea that the cash rate needs to go lower."

Investor confidence appears tentative, leading them to adjust the likelihood of a rate cut next week to 50 percent, down from 60 percent. However, a decrease by November is fully expected.

Three-year government bond yields stood at 1.56 percent, significantly lower than the overnight cash rate, while the Australian dollar softened slightly to $0.7501.

The Australian Bureau of Statistics reported that the headline CPI rose by 0.4 percent last quarter, rebounding from a 0.2 percent decline in the previous quarter.

The largest price increases were observed in healthcare, petrol, tobacco, and new home purchases, balanced out by declines in domestic holiday travel, accommodation, motor vehicles, and telecommunications.

THE EXPECTATIONS LOOP

Despite Australia’s economy growing at a robust 3.1 percent, it has not been immune to global deflationary pressures. An oversupply, particularly from China, has negatively impacted prices for various tradable goods.

Domestically, intense competition and a slack labor market have contributed to wage growth declining to recessionary levels. Additionally, a surge in foreign retailers has sparked a price war across numerous sectors, encouraging consumers to postpone purchases in the hopes of better deals.

Rents, which form a significant part of the CPI basket, have also started to slow due to an influx of rental properties combined with record levels of new housing construction. This has resulted in rent growth reaching its lowest levels in over a decade.

These factors have contributed to a decline in expectations for future inflation, potentially creating a self-fulfilling cycle reminiscent of challenges faced by Japan and Europe.

Michael Blythe, chief economist at Commonwealth Bank, noted that approximately two-thirds of the components of the CPI are now growing at less than 2 percent per annum. He cautioned, "The risk is that it does feed into expectations over time as we’ve seen in other countries. It just makes the job of running monetary policy that much harder."