Australia's Q2 Inflation Stays Low, Keeps Rate Hike Prospects Distant

Australian consumer prices stayed lukewarm last quarter with core inflation extending a record run of keeping below the central bank's target, bolstering bets policy will remain stimulatory for a long time to come. (Reuters Photo/Jason Reed)

By : Swati Pandey | on 8:00 AM July 26, 2018
Category : International, Asia-Pacific

Sydney. Australian consumer prices stayed lukewarm last quarter with core inflation extending a record run of keeping below the central bank's target, bolstering bets policy will remain stimulatory for a long time to come.

Data from the Australian Bureau of Statistics (ABS) on Wednesday (25/07) showed the headline consumer price index rose 0.4 percent quarter-on-quarter in the June quarter, just under forecasts of a 0.5 percent increase, and unchanged from the last quarter.

Annual CPI inflation crawled at 2.1 percent versus expectations centered on a 2.2 percent gain. Key measures of underlying inflation favored by the Reserve Bank of Australia (RBA) averaged around 1.9 percent for the year, in line with forecasts.

Core inflation has now undershot the RBA's long-term target band of 2 percent to 3 percent for ten straight quarters, the longest such run on record.

A major headwind has been underwhelming wages growth, which is running near historic lows even as employment has boomed.

As a result, the central bank has kept interest rates at an all-time low of 1.5 percent since mid-2016 and sees "no strong case" for shifting its stance anytime soon.

Interest rate futures do not fully price in a hike to 1.75 percent until end of 2019.

With the data almost in line with expectations, the Australian dollar eased a tad to $0.7415 from a two-week high of $0.7450 set overnight.

Rental Pressures

The ABS reported a small acceleration in inflation in tradable prices – goods that are most affected by international competition – which rose 0.5 percent in the quarter thanks to higher petrol prices.

In contrast, prices of non-tradables, or domestic-driven inflation, which mainly cover services crawled at 0.3 percent. In particular, there was barely any inflation for those goods and services whose prices are not determined by the government.

The main price decreases in the June quarter were for holiday travel and accommodation and vegetables while health care and petrol contributed positively to the index.

Economists fear further downside pressure on inflation from easing home rentals, particularly in Sydney where the property market is slowing and house prices are in a downward spiral.

"Further out, it will be important to watch the influence of rents in Sydney, which has a large weight in national calculations," economists at NAB said in a note.

Home prices in Sydney, Australia's largest city, have fallen in every single month since late last year as a huge number of new apartments hit the market and following a regulatory clampdown on mortgage lending by banks.

"Rental vacancy rates are beginning to rise in Sydney as significant new housing stock comes on stream, which will no doubt be a restraining factor for rents and core inflation in the period ahead."

Reuters

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