Inflation at lowest level since 1999, leaving door open for RBA rate cut
Annual inflation has fallen to its lowest level in 17 years, opening the door for a potential interest rate cut when the Reserve Bank board meets next week.
The consumer price index rose just 0.4 per cent in the June quarter, dragging the annual rate down to just 1 per cent and well below the central bank's 2-3 per cent inflation target band.
The Australian dollar initially rose as the average pace of underlying inflation was a shade higher than forecast at 1.5 per cent.
Yet the overall theme was still one of very weak price pressures and the currency soon faded.
Underlying measures of inflation - which smooth out volatile price swings - were equally benign at an average 0.45 per cent in the quarter for 1.5 per cent over the year, but were a little stronger than economists had expected and suggest a rate cut is not definite.
The biggest price gains came for healthcare, petrol, tobacco and new home purchases. That was balanced by falls in domestic holiday travel and accommodation, motor vehicles and telecoms.
'We're sticking with a cut next week'
RBC Capital Markets senior economist Su-Lin Ong says the figures give the RBA enough impetus to cut rates on Tuesday.
"The key is obviously the core measures which continue to print at very modest levels averaging a little under a half a per cent for the quarter.
"The annual rate for core inflation remains steady at around 1.5 per cent, so it's a continued undershoot of the inflation target.
"Importantly it's in line with the RBA's own forecast both for the quarter and medium term as well. It's enough for them to cut if they want to move next week because it confirms that very benign inflationary environment and outlook and we know that weaker wage and unit labour cost data also supports that. We are sticking with a cut next week."
JP Morgan economist Tom Kennedy says the door is well and truly open for the RBA to cut.
"We think that this print is low enough to see the RBA provide a bit more support to the economy.
"For us, this is definitely consistent with the idea that the cash rate needs to go lower."
Investors were a little less sure and slightly lengthened the odds of a cut next week to 50 per cent from 60 per cent ahead of the data.
The central bank had already cut rates to an all-time low of 1.75 per cent in May following an alarmingly weak inflation report for the first quarter.
AHY Price at posting:
$1.40 Sentiment: None Disclosure: Not Held
