Aussie Dollar Rises After Inflation Rebounded in Second Quarter

“At the same time, companies faced with a more competitive environment, their ability to pay (wage increases) is lower than it used to be… reinforcing the weakness we’re seeing in inflation”, Oliver said, adding Australia’s labor market too has slack, weighing on wage growth.

The June quarter consumer price index report for Australia was released today and the headline number rose +0.4% q/q for the June quarter which took the annual rate down to its lowest level in 18 years at 1.0% (relative to +1.3% y/y in March). For the June quarter, the CPI went up only 0.4 percent.

That helped compel the Reserve Bank of Australia (RBA) to cut the cash rate in May to its current 1.75%, a record low. It predicted the economy probably cooled last quarter, momentum in the jobs market has eased and inflation is set to remain weak.

We just about lean in favour of a 25bp cut given the data will not alleviate low inflation concerns within the RBA.

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“With the CPI figures always a central component of the RBA’s decision, the latest inflation data looks like being the trigger for a rate cut next week”.

Underlying measures of inflation – which smooth out volatile price swings – while equally benign, were a fraction higher than economists predicted and caused financial markets to row back on their interest rate cut expectations.

Consumer prices rose 0.4% in the second quarter and were up 1.0% from a year earlier, the Australian Bureau of Statistics said Wednesday.

Capital Economics chief economist Paul Dales said the RBA still wanted to see more inflationary pressure and tipped the RBA to pull the trigger and cut rates to 1.5 per cent next week and cut further to 1 per cent next year. Any such rate cut, however, would largely be dependent upon the impending CPI inflation reading.

Housing rents, which are affected by a surge in supply of new apartments, were particular weak during the quarter, rising just 0.2 per cent.

The next focus will be on the US Federal Reserve’s policy announcement later on Wednesday.