RBA rate cut still in balance after inflation figures

Next week’s RBA meeting is on a knife-edge after new inflation data, although one economist calls a rate cut a “done deal”.

Consumer prices have risen in line with expectations.

Next week’s Reserve Bank policy meeting remains on a knife-edge after June quarter inflation numbers were broadly in line with market expectations, although one economist believes a rate cut is now almost a “done deal”.

According to the Australian Bureau of Statistics, consumer prices rose by 0.4 per cent from the prior quarter and 1 per cent over the year to June 30.

The numbers were largely in line with projections for 0.4 per cent and 1.1 per cent, respectively.

The yearly rise of 1 per cent is the lowest since the June quarter of 1999.

The mixed update led the Australian dollar to trade wildly as investors weighed the implications for monetary policy.

Futures markets are currently pricing in a 50.5 per cent chance of a cut in August and a 78.5 per cent chance of a downward move by the end of the year.

This represents a minor reduction from 54.6 per cent and 81.2 per cent ahead of the ABS release.

The numbers reveal just how uncertain the market is on next week’s RBA meeting, with strong growth, rising house prices and steady jobs numbers potentially stopping the central bank from trimming rates again in a bid to stir low inflation.

However, Capital Economics chief Australian economist Paul Dales is adamant the numbers pave the way for immediate action from the Reserve Bank.

“Australia’s second quarter CPI inflation figures make a rate cut at next Tuesday’s RBA meeting pretty much a done deal and we believe that continued low underlying inflation will prompt the RBA to eventually reduce rates to 1 per cent,” he said.

IG chief market strategist Chris Weston said he believed a cut was being “modestly underpriced” by the market, although he contends the latest figures offer traders no certainty.

“If the RBA focused specifically on headline inflation then a cut would be in the bag and perhaps we could even be debating an even deeper cut,” he said.

“However, that of course is not the case and the 0.5 per cent quarterly growth in underlying inflation, leading to a 1.7 per cent annualised pace, does throw some concern as to whether they cut rates in August.”

Mr Weston added that any economist that held a view the RBA would cut in August was unlikely to change that projection based on the latest data.

In May, the Reserve Bank reacted swiftly to news of Australia’s first quarter of deflation for seven years, cutting rates to a record low of 1.75 per cent.

The March quarter numbers revealed a quarterly decline in prices of 0.2 per cent but a year-on-year lift of 1.3 per cent, above the annual rate revealed today.

In the latest set of numbers, for the three months to June 30, the biggest price gains were recorded in medical and hospital services (+4.2 per cent), petrol prices (+5.9 per cent), tobacco (+2.1 per cent) and new home prices (+0.9 per cent).

It was the second quarter in a row medical and hospital services came in the top three, ramping up the focus on the nation’s ballooning healthcare costs.

Meanwhile, fuel prices rebounded sharply after a 10 per cent slump in the March quarter.

The major rises were partially offset by falls in domestic holiday travel and accommodation (-3.7 per cent), motor vehicles (-1.3 per cent) and telecommunication services (-1.5 per cent).

The Australian dollar initially lifted as much as US0.5c on the news before quickly reversing course to move below the US75c mark.

At 12.45pm (AEST), it traded at US74.98c, down from US75.18c just prior to the announcement.