Australian inflation slows more than expected, raising doubts about further interest rate hikes.
Australia’s Inflation Slows to 17-Month Low
Good news for consumers and interest rates
The latest data from the Australian Bureau of Statistics reveals that Australia’s inflation rate has slowed to a 17-month low in July. This is primarily due to decreases in holiday travel and fuel prices. The measure of core inflation has also cooled, indicating that interest rates may not need to rise again.
As a result, market analysts are now predicting a 99.5% probability that the Reserve Bank of Australia will pause its rate hikes for a third consecutive month in September. This is a positive sign for consumers, as inflation is easing as desired.
Furthermore, the likelihood of one last rate hike by the end of the year has been reduced to just 35%. This suggests that the Reserve Bank of Australia is now largely finished with tightening monetary policy.
The monthly consumer price index (CPI) rose by 4.9% in the year to July, which is lower than the previous month’s 5.4% and market forecasts of 5.2%. However, there was a positive sign as CPI increased by 0.3% in July on a monthly basis, bringing the three-month annualized rate back within the RBA’s target band of 2-3%.
Price increases for tradable goods also eased to 1.7% in July compared to the previous year, indicating that global disinflationary pressures are reaching Australia.
Overall, this news has had an impact on the Australian dollar and bond futures, with the currency slipping and futures rallying.
Shane Oliver, chief economist at AMP, commented, “So far, so good - the inflation numbers are less than expected. Obviously, it’s partly helped by energy subsidies.” However, Oliver also noted that rent inflation and electricity prices are still areas of concern.
The Reserve Bank of Australia has raised rates by 400 basis points since May last year, reaching an 11-year high of 4.1%. Incoming Governor Michele Bullock has warned that rates may need to rise again, but the current data suggests an extended pause may be more likely.
With retail sales showing overall softness, underwhelming wage gains, and signs of a cooling labor market, the RBA will be closely monitoring the situation. The trimmed mean, a closely watched measure of core inflation, has also eased to 5.6% from 6.0%, indicating a positive trend.
While the path ahead is still uncertain, the efforts to bring down inflation are showing progress. However, there is a lingering risk of recession. As Oliver at AMP stated, “We are still on the narrow path and we’re getting inflation down – there is no doubt about that. The only uncertainty is whether we have gone too far and hit the recession, the risk is still high.”
(Reporting by Stella Qiu and Wayne Cole; Editing by Muralikumar Anantharaman, Sam Holmes and Raju Gopalakrishnan)
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