Australia inflation remains soft, keeps rate cut door open

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SYDNEY: Australian consumer prices rose 0.2 percent in the three months to March, data showed on Wednesday, with the annual headline inflation rate softening to give the central bank room to cut interest rates.

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The slight rise in the Consumer Price Index (CPI) for the first-quarter of 2015 took the annual rate of inflation to 1.3 percent, according to the Australian Bureau of Statistics—in line with analysts’ expectations.

Headline inflation also grew 0.2 percent in the previous September-December period. But the annual rate of growth slowed from 1.7 percent for the three months to December.

The softer inflation figures were driven by a 12.2 percent drop in fuel prices and a 8.0 percent dip in the prices of fruit.

Moving in the opposite direction were seasonal lifts in the cost of tertiary education, which increased by 5.7 percent, and medical and hospital services, which rose by 2.2 percent.

Underlying or core inflation, which strips out volatile items and is more closely watched by the Reserve Bank of Australia, came in at 0.6 percent and took the year-on-year rate to 2.35 percent.

Annual core inflation for the previous period was marginally weaker at 2.3 percent.

While the latest annual core inflation rate was stronger than the headline figure, it was near the bottom end of the Reserve Bank of Australia’s 2 percent to 3 percent inflation target band.

It kept the door open for the central bank to ease the cash rate again after slashing it to a new record low of 2.25 percent in February.

“We did see underlying CPI edging up in annual terms, but if we look at it, it indicates that inflation remains contained,” St George Bank senior economist Jo Horton told Agence France-Presse.

“It does give the RBA room to cut interest rates again in May, which is what we think will happen.”

The core inflation figures boosted the Australian dollar, which rose almost half a US cent to 77.60 US cents.

Easing bias
The Reserve Bank has maintained an easing bias since it cut the cash rate for the first time in 18 months two months ago.

The Australian economy is facing a rocky path ahead, with non-mining sectors yet to fill the gap left by a fall-off in resources investment after an unprecedented boom.

Some analysts expect another rate cut in May and said the latest inflation data had not changed their forecasts.

“We retain the view that the RBA will cut the cash rate further in May on the basis of weak outlook for domestic demand, particularly non-mining business investment,” ANZ bank’s co-head of Australian economics Riki Polygenis said in a note, although she added it would be a close call.

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