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Australia inflation surprisingly soft, lengthens odds on rate hike

Australia inflation surprisingly soft, lengthens odds on rate hike

SYDNEY: Australian consumer prices were surprisingly soft last quarter and core inflation rate stayed below target for a sixth straight quarter, a reminder of just why interest rates in the country are at record lows and set to remain there for months to come. The local dollar slipped a quarter of a cent as the consumer price index (CPI) rose 0.2 percent in the second quarter and 1.9 percent for the year, well short of the 2.2 percent increase expected. Underlying inflation rose 0.5 percent in the second quarter, from the first, which matched market forecasts.

The annual rate of 1.8 percent was again short of the Reserve Bank of Australia’s long-term target band of 2 percent to 3 percent, where it has been since the start of 2016. “Obviously the RBA is not going to be happy with these levels. Core inflation has been too low for too long,” said Tom Kennedy, an economist at JPMorgan. “The RBA is not going to be thinking about rate hikes anytime soon.” The protracted period of subdued inflation led the central bank to cut interest rates to a record low of 1.5 percent last year and it has been on hold ever since. Investors reacted to the inflation news by paring an already slim chance of a hike, with interbank futures implying an 8 percent probability of a move by December.