Inflation figures point to RBA cutting interest rate further

Headline and underlying inflation rates are now in the bottom half of the RBA’s target band for the first time since August 2021.

The latest inflation data points to an interest-rate cut next month. Artwork: Frank Ling

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Economists are close to locking in another 0.25 percentage ­interest rate cut by the Reserve Bank next month after key inflation readings rose by less than economists expected.

Headline inflation rose 2.1 per cent in the year to May after a drop in fuel prices before the Middle East conflict and an easing in rental costs. Underlying inflation – which the RBA focuses on – eased to 2.4 per cent, down from 2.8 per cent in April.

Both rates of inflation are now in the bottom half of the RBA’s target band for the first time since August 2021, giving the RBA greater comfort to continue cutting rates.

Jim Chalmers said that while the inflation rates were heading in the right direction, it was not enough to declare victory over ­inflation, which reached as high as 7.8 per cent.

“We know these monthly numbers are volatile, but today’s data shows we’ve made substantial and sustained progress on ­inflation,” the Treasurer said.

“I’m reluctant to say it’s ­mission accomplished, but we are certainly making more progress than was expected.”

Economists were watching services inflation, which moderated to 3.3 per cent, down from the annual 4.1 per cent rate last month. Goods including garments and recreation saw sharp price falls ahead of EOFY sales.

The monthly data, captured before Israel and the US launched attacks on Iranian nuclear facilities, recorded automotive fuel prices falling 2.9 per cent in May and 10 per cent through the year. That was after having fallen 2.6 per cent in April.

Trimmed mean inflation – which takes out volatile items such as fuel – recorded its lowest annual rate since November 2021.

Annual rental inflation was 4.5 per cent, lower than the 5 per cent rise in the year to April, leaving the lowest annual growth in rental prices since December 2022, and consistent with smaller increases in advertised rents across most capital cities.

Commonwealth Bank economists said they now expected the RBA to cut rates by 0.25 percentage points to 3.6 per cent at its July 7-8 meeting.

“A combination of a dovish May RBA decision and the flow of data since sees us shift our base case to a rate cut in July,” CBA’s Belinda Allen said. “Today’s monthly CPI print capped off a flow of data that should provide comfort to the RBA that a swifter return of the cash rate to neutral is both manageable and needed.”

The RBA, which briefly considered a 0.50 percentage point rate cut at its last meeting, still has a weighty decision on its hands in July. On one hand, inflation has come down and the closely watched NAB business survey showed business conditions sitting below the long-term average, while geopolitical uncertainty ­remains high.

However, the bank still has to take into consideration that while uncertainty around trade wars has diminished, the labour market is still tight and the more important full-quarter CPI print is still to come.

Betashares chief economist David Bassanese said that while the low trimmed mean result kept the door open for a rate cut in July, he was sticking to his base case for the bank to wait until August to cut again.

Andrew Boak of Goldman Sachs said he saw a strong argument for the RBA to promptly ­remove the restrictiveness of monetary policy by cutting the cash rate starting in July.