In the three months ending in June, Australia’s core inflation rate declined, which strengthened the case for the Reserve Bank of Australia to ease monetary policy as early as August if there were signs of easing price pressures.
Data released by the Australian Bureau of Statistics on Wednesday showed that the closely watched consumer price index (excluding more volatile items) rose 0.6% quarter-on-quarter in the second quarter, lower than the expected 0.7%. It rose by 2.7% year-on-year, in line with expectations, but lower than 2.9% in the first quarter.
The Reserve Bank of Australia is focusing on core inflation as government tax rebates have curbed overall inflation data, blurring its judgment on price pressures across the entire economy. The annual inflation data only fell into the Reserve Bank of Australia’s target range of 2-3% in the first quarter, indicating that policymakers can now shift their focus from inflation to supporting economic growth.
The Australian dollar gave back its earlier gains, while the yield on policy-sensitive three-year bonds continued to fall as traders fully digested expectations of a rate cut by the Reserve Bank of Australia next month. The stock market rose.
Prashant Newnaha, senior interest rate strategist for Asia-Pacific at TD Securities in Singapore, said: “At present, there is a high possibility that the Reserve Bank of Australia will cut interest rates in August. The extraordinary upward result is the only factor preventing the Reserve Bank of Australia from adopting a wait-and-see attitude.
The median estimate of a Bloomberg survey shows that economists expect three more interest rate cuts from now until early 2026. Some of them say that the recent weakness in the job market is one of the reasons for concern.
During this cycle, the Reserve Bank of Australia has cut interest rates twice, reducing the cash rate to 3.85%. Earlier this month, the central bank kept borrowing costs unchanged, which contradicted the widely expected interest rate cut and caught investors off guard. Last week, the governor of the Reserve Bank of Australia, Michelle Brock, said that the Reserve Bank of Australia’s Rate-setting committee believes it is appropriate to adopt a “gradual” easing policy.
Brock also said that the Reserve Bank of Australia may not need to cut interest rates “significantly” like its global counterparts, as it did not take such aggressive tightening measures during the inflation outbreak in 2022-23.
The Australian Bureau of Statistics said that data released on Wednesday showed that the annual increase in service prices dropped from 3.7% to 3.3%, the lowest level in three years, affected by the decline in rental and insurance prices.
The report also shows that the prices of non-essential goods and services rose by 2.4% year-on-year, among which the prices of international travel, clothing and furniture increased. Prices of non-essential goods and services rose by 1.8% year-on-year, among which the prices of fruits and vegetables, electricity and rent increased.
