Australias Consumer Inflation Hits 13-Month Low Adding to Rate Pause Case

Australian consumer inflation slowed to a 13-month low, allowing the Reserve Bank to delay a further rate rise next week. The annual increase in the price index slowed to 5.6% in May from 6.8% the previous month and well below market forecasts of 6.1%. Inflation retreated as the sharp pullback in fuel prices weighed on overall cost increases.

The trimmed mean measure of core inflation also cooled, further supporting the view that the RBA will unlikely need to raise interest rates again soon. The annual increase in the trimmed mean slowed to 6.1% from 6.7% the previous month, which is still more than double the top of the central bank’s 2-3% target band.

Headline inflation was weighed down by falling fuel prices and higher utility costs, including electricity, after several unplanned outages at coal-fired power stations. Excluding volatile items and holiday travel, the pace of growth in consumer prices was more modest, according to the Australian Bureau of Statistics (ABS).

Annual underlying inflation was up 2.1% in the first quarter, marking the slowest increase since December. That will likely continue as lower oil prices fade and further moderation in housing market activity dampens domestic demand. Inflation is expected to remain below the RBA’s target range for some time, with most economists predicting it will take until 2019 for underlying inflation to return to the bank’s target.

The data comes just days before the RBA’s policy meeting. Many economists had previously expected the central bank to announce a further interest rate rise next week, lifting the cash rate to 4.35%. But the easing in headline inflation is likely to reduce the likelihood of a rate rise, with some analysts now expecting the next move could be as early as September.

Investors reacted swiftly to the data, pushing the AUD to a near three-month low against the USD. The currency fell as much as a quarter of a US cent to $0.6632 after the report, and swaps traders lowered their probability of a July rate hike to 30% and wagered that rates are more likely to peak at 4.35% instead of 4.6%.

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