Australia’s inflation cools sharply, paving way for August rate cut

Australia’s consumer price growth slowed to its weakest pace in more than four years in the June quarter, boosting expectations that the Reserve Bank of Australia (RBA) will resume interest rate cuts as early as August. Headline inflation rose just 2.1 per cent year-on-year, down from 2.4 per cent in the March quarter and below the 2.2 per cent median forecast from economists polled by Reuters. On a quarterly basis, the consumer price index (CPI) climbed 0.8 per cent, while core inflation, measured by the trimmed mean, rose 0.6 per cent, also softer than expectations.

The annual pace of core inflation fell to 2.7 per cent, the lowest since mid-2021 and near the midpoint of the RBA’s 2-3 per cent target range. The figures, released on July 30 by the Australian Bureau of Statistics (ABS), reinforce the view that inflation has largely been tamed, especially with temporary government cost-of-living subsidies still exerting downward pressure on prices. Market reaction was swift, with traders pricing in a near-100 per cent chance of a 25-basis-point rate cut at the RBA’s next meeting on August 12. The Australian dollar held steady around $0.6512, and bond yields dipped as investors digested the softer inflation print.

Services, housing prices ease; supply issues still bite

Much of the disinflation stemmed from a broad-based easing in price pressures, particularly in housing, healthcare, and services. Notably, annual services inflation slowed to 3.3 per cent, the lowest in three years, helped by falling rents and insurance costs. The cost of new dwellings, which surged during the 2022-23 construction boom, rose just 0.7 per cent year-on-year, down sharply from a 1.6 per cent increase in Q1 and a peak of nearly 21 per cent two years ago. Builders have reportedly responded to soft demand with discounts and promotions.

Still, some categories continued to face upward pressure. Egg prices spiked 19.1 per cent over the year due to avian flu-related supply disruptions, and non-alcoholic beverages became more expensive amid higher global prices for coffee, tea, and cocoa. Non-tradables, typically influenced by domestic conditions like rents and utility costs, rose 0.7 per cent in the quarter, while tradables, subject to global forces and currency movements, climbed 1 per cent.

RBA expected to resume cuts amid weak growth outlook

The inflation data comes as Australia’s broader economic momentum remains sluggish. GDP grew just 1.3 per cent year-on-year in Q1, missing forecasts, and unemployment rose to a 3.5-year high of 4.3 per cent in June.

RBA Governor Michele Bullock had warned earlier this month that headline inflation might temporarily pick up later in the year as rebates expire. However, she also signalled a shift in focus toward supporting growth, noting that Australia didn’t hike rates as aggressively as other major economies during the pandemic-era inflation surge.

Analysts at the Commonwealth Bank and Bank of America now expect a rate cut in August, with more to follow. AMP forecasts four additional cuts, bringing the cash rate down to 2.85 per cent by mid-2026.

(With inputs from agencies)