Australia inflation surprisingly soft, lengthens odds on rate hike - Metro US

Australia inflation surprisingly soft, lengthens odds on rate hike

By Wayne Cole

SYDNEY (Reuters) – Australian consumer prices were surprisingly soft last quarter and core inflation rate stayed below target for a sixth straight quarter, a reminder of just why interest rates in the country are at record lows and set to remain there for months to come.

The local dollar slipped a quarter of a cent as the consumer price index (CPI) rose 0.2 percent in the second quarter and 1.9 percent for the year, well short of the 2.2 percent increase expected.

Underlying inflation rose 0.5 percent in the second quarter, from the first, which matched market forecasts.

The annual rate of 1.8 percent was again short of the Reserve Bank of Australia’s long-term target band of 2 percent to 3 percent, where it has been since the start of 2016.

“Obviously the RBA is not going to be happy with these levels. Core inflation has been too low for too long,” said Tom Kennedy, an economist at JPMorgan. “The RBA is not going to be thinking about rate hikes anytime soon.”

The protracted period of subdued inflation led the central bank to cut interest rates to a record low of 1.5 percent last year and it has been on hold ever since.

Investors reacted to the inflation news by paring an already slim chance of a hike, with interbank futures implying an 8 percent probability of a move by December.


The main price increases last quarter were in health care, taxes on tobacco and the cost of buying a house. Offsetting that were falls in holiday travel, petrol and fruit, according to data from the Australian Bureau of Statistics.

There are still plenty of headwinds to inflation.

While higher utility charges should add to CPI this quarter, they also act as a tax on consumer spending power at a time when wage growth is already at all-time lows.

Recent gains in the local dollar are also likely to suppress prices for many imported goods, particularly tech products.

The RBA itself doubts inflation will get above 2 percent for another year or more, but is wary of cutting interest rates again for fear of stoking a debt-driven bubble in the Sydney and Melbourne housing markets.

Neither is it in any rush to hike. Speaking just last week, RBA Deputy Governor Guy Debelle argued there was no automatic reason for Australia to follow some of its peers in tightening.

The global forces keeping rates low would “continue to do so for the foreseeable future,” said Debelle, quashing market talk of a hike before year-end.

(Reporting by Wayne Cole; Editing by Eric Meijer)

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