SYDNEY: Australia’s core inflation comes in cooler than anticipated in the last quarter, prompting money markets to slash bets on another interest rate increase this year.
The annual trimmed mean gauge of consumer prices, which shaves off volatile items, rose 3.6% versus economists’ estimate of 3.7%, data from the Australian Bureau of Statistics showed yesterday.
The Reserve Bank of Australia (RBA) aims for the midpoint of its 2% to 3% band, a level it hasn’t reached in more than four years.
On a quarterly basis, the underlying measure rose 0.8% from three months earlier, compared with a 0.9% forecast.
Traders sharply wound back wagers on another rate hike this year to about 50%, from more than 90% before the report.
The currency dipped and the policy-sensitive three-year government bond yield declined nine basis points to 4.48%.
The print was “softer than we expected and it was pretty nice to see some hot services categories ticking down in June”, said AMP economist My Bui.
“It’s still high though, so we still think there is potential for one more hike this year.”
The RBA raised rates at its first three meetings of the year to try to suppress resurgent inflation pressures that emerged even before the US-Iran war unleashed a global energy shock.
The consumer price index suggested that while prices remained elevated, the board was unlikely to need to resume tightening on Aug 11, when the bank will also release updated quarterly forecasts.
RBA governor Michele Bullock, responding to a question after a major set-piece speech on Tuesday, acknowledged that the longer inflation “is out of target, the more concerned that the board becomes”.
She noted that in the most recent forecasts, core prices were only seen falling below 3% late next year, after already being high for an extended period.
“Let’s just hope there’s no more shocks,” she said, referring to the current Middle East conflict, which came on the heels of the Ukraine war and the pandemic before that. All helped drive global price pressures.
Australia’s economy has become more inflation-prone as sluggish productivity for more than a decade has lowered the potential growth rate, the level of expansion the economy can manage before it begins fuelling inflation.
The RBA’s job has also been complicated by the on-again, off-again nature of talks between the United States and Iran to try to end their war, reopen the Strait of Hormuz, and allow oil to flow once again.
Fuel prices have been on a rollercoaster ride as markets track the latest comments on the chances of a peace deal against renewed eruptions of violence.
The other difficulty for the RBA has been a tight labour market that makes it difficult to cool price pressures.
Australia’s employment growth surged again in June, even as the unemployment rate stayed unchanged.
In early July, RBA assistant governor Sarah Hunter warned more supply shocks were likely in the period ahead as global instability increases, reinforcing the need to aim for low and stable inflation.
Hunter is scheduled to hold a fireside chat this morning in the last calendar event before the board meets in August. — Bloomberg
