The market reacts to falling inflation with growing optimism for rate cuts.
On Wednesday, the Australian Bureau of Statistics (ABS) released its June quarterly consumer price index (CPI), revealing declines in both headline CPI and the annual trimmed mean inflation rate. As a result, markets are now increasingly betting on an August rate cut.
"That data really just reaffirms the case for the RBA to cut rates," Madeline Dunk, economist at ANZ, told Australian Broker. "If you think about the things that the RBA seemed to be looking for, that it signaled in its minutes, it was around what we were going to see in the labor market, what was going to happen with inflation, and then also what the stats updated forecasts were, the market was seeing a bit of a loosening there.
"Today's CPI data, if you annualize that, that's annualizing just below the midpoint of the RBA target band," Dunk said. "I think the RBA will be pretty comfortable with today's numbers, and it should set the scene for them to cut rates at their next meeting."
The Reserve Bank of Australia (RBA) caught markets off guard earlier this month when it decided to hold the official cash rate (OCR) at 3.85%.
In her address regarding the central bank's decision, RBA governor Michele Bullock said the board had adopted a wait-and-see approach, and would need to see the June quarterly CPI before making any further decisions on monetary policy. However, the governor made it clear that there would be more rate reductions. It wasn't a question of if, but when – when being once inflation consistently remains within the RBA's target range of 2% to 3%.
But Wednesday's inflationary data hints at the direction of interest rates in Australia.
ANZ expects the RBA to knock 25 basis points off the OCR at its August meeting.
Commonwealth Bank (CBA) also expects a rate cut of 25 basis points next month.
"The Q2 25 CPI was a very encouraging set of numbers. Trimmed mean CPI is moderating and the disinflationary pulse in the economy appears on track based on the underlying components," said Harry Ottley, economist at CBA. "The RBA should be pleased with the latest inflation results. Not only just the headline and trimmed mean quarterly prints, but the components as well. Good progress is being made on housing, market services and the stickier administered prices.
"We expect a follow up 25 basis points rate cut in November to take the cash rate back to around neutral levels," Ottley said.
Meanwhile, another key indicator of monetary policy direction – Australia’s unemployment rate – held steady at a low 4.2% in June, ticking up slightly from 4.1% in May.
The RBA's next meeting on monetary policy is scheduled for 11-12 August.
