Australia inflation cools, removes rate danger

SYDNEY: Australian consumer prices rose by much less than expected last quarter while core inflation slowed to a three-year low, all but ruling out the need for an interest rate rise next week and possibly the rest of the year.
The Australian dollar slid half a cent and interbank futures surged as the market priced out any chance of a rise in the 4.5 per cent cash rate by the Reserve Bank of Australia (RBA) at its monthly policy meeting on August 3.
That will be a relief for the Labor government as it is locked in a tough election battle and a hike ahead of the August 21 poll might have hurt it with mortgage-laden voters.
"The RBA was counting on a cooling in inflation and these figures provide strong evidence that they were right to," said Brian Redican, a senior economist at Macquarie.
Annual underlying inflation slowed to 2.7 per cent in the second quarter, when analysts had expected it to stay stubbornly high at 3 per cent. That took it back into the RBA's 2 to 3 per cent target band for the first time since mid-2007.
"It removes the risk of a hike in the next few months," said Redican. "If retail sales accelerate in the run-up to Christmas, they may move in December. But it's all clear for now."
Investors clearly agreed, with interbank futures jumping to imply no chance at all of a move in August and only a 22 per cent probability of a hike by year-end. Earlier, they had shown an 80 per cent chance of a rise by Christmas.
A Reuters poll of 19 economists showed all now expected no change next week. Rates were seen ending the year at 4.75 per cent, compared to 5 per cent in a prior poll.-Reuters