Australia’s Second-Quarter Inflation: Crucial for Rate Cut Decision, Says Reuters

By Wayne Cole

SYDNEY (Reuters) – Australian inflation is expected to have reached record lows in the second quarter, based on analyst predictions, which could strengthen the rationale for a potential interest rate cut as soon as next month.

Following a surprising decline in underlying inflation to a historic low of 1.5 percent in the first quarter, the Reserve Bank of Australia (RBA) reacted quickly by lowering the cash rate by a quarter of a percentage point to 1.75 percent.

Many analysts predict that if core inflation drops to a new low of 1.4 percent, as anticipated in a recent poll, the RBA may take similar action again. The inflation data will be released on July 27.

Felicity Emmett, head of Australian economics at ANZ, noted, "If underlying inflation aligns with expectations, it would reinforce the weak trend. Coupled with weaker labor and housing markets and a stronger Australian dollar, this would provide sufficient reasons for the RBA to consider a cut."

She cautioned that a higher-than-expected inflation outcome would suggest that disinflationary pressures might be diminishing.

Analysts believe that a quarterly increase of 0.6 percent or more could lead the RBA to hold off on cuts, while a rise of 0.4 percent or lower would likely seal the possibility of a rate reduction. An increase of 0.5 percent would make the decision more precarious.

The central bank evaluates various measures of core inflation, but market attention typically focuses on the trimmed mean and weighted median, which eliminate the most extreme price changes in any given quarter to find a more accurate underlying trend.

The headline consumer price index (CPI) can be influenced by significant fluctuations in certain sectors, such as fuel and fresh produce. In the first quarter, the CPI experienced a rare 0.2 percent decline. The CPI is projected to rise by 0.4 percent in the second quarter, although the annual growth rate would still decline to 1.1 percent.

Significant underlying factors contributing to the slowdown include a global surplus of supply relative to demand, a relatively strong Australian dollar, and record-low wage growth domestically.

A price war in the retail sector, intensified by foreign competition, along with weakening rents amid a high supply of new apartment developments, is further exacerbating disinflation.

The longer these trends persist, the greater the risk they could become ingrained in businesses’ pricing and wage decisions. This negative feedback loop has already become evident in neighboring New Zealand, where annual inflation fell to just 0.4 percent last quarter.

Scott Haslem, an economist at UBS, remarked, "Given our view that structural disinflationary forces in Australia are likely intensifying and the RBA’s expressed concern about the risk of persistently low inflation, we expect another rate cut in August."