Inflation Data Slows, Adding Reasons for RBA to Cut Rates
On June 26, latest data from the Australian Bureau of Statistics showed that the Consumer Price Index (CPI) rose by 2.1% year-on-year in May, below the market's previous estimate of 2.3% and close to the lower end of the RBA's target range of 2%-3%. This result strengthens the possibility of the Reserve Bank of Australia initiating a rate cut in the upcoming July meeting.
The data shows that Australia's CPI has been within the target range for 10 consecutive months, with overall inflation being moderate. The unexpected decline in inflation has quickly heightened market expectations for further monetary policy easing.
Core Inflation Hits a New Two-and-a-Half-Year Low
Besides the overall CPI, the "trimmed mean" inflation rate, which excludes volatile items like food and energy, also slowed down. The annual core inflation rate fell to 2.4% in May, down from 2.8% in the previous month, hitting its lowest level since November 2021.
Michelle Marquardt, head of prices statistics at the Australian Bureau of Statistics, pointed out that government subsidy measures for energy bills, along with tax rebate policies in the education and healthcare sectors, effectively eased price pressures, significantly slowing down the core price growth. This provides the RBA with greater policy space for subsequent easing measures.
Market Reacts Swiftly, Rate Cut Probability Rises to 90%
After the data release, the Australian dollar rate slightly declined, and the yield on three-year government bonds, which is highly sensitive to interest rate policy, also fell. The market's bet on an RBA rate cut in July rapidly increased from slightly over 80% to about 90%.
Many analysts noted that the current trend of slowing inflation is stable, and if the labor market and consumption data do not show a significant rebound, the RBA is highly likely to announce a 25 basis point rate cut at the monetary policy meeting on July 7-8. This would be the bank's first policy shift since entering a wait-and-see period at the end of 2024.
Government Measures Effective in Controlling Inflation Pressure
Government subsidies and tax rebate measures have stabilized some key living expenses, becoming a major force in curbing inflation. Energy price subsidies, education cost reductions, and some prescription drug price limit measures have effectively alleviated the pressure of rising prices, reducing the burden on household spending.
Additionally, the RBA is particularly sensitive to "core inflation," viewing it as a key indicator of true inflation pressure. The significant decrease in current core inflation provides an even stronger rationale for easing policies.
Inflation Slowdown to Reshape Policy Path
Although the RBA has adopted a wait-and-see strategy over the past few months, the sharp cooling of this inflation data may become a turning point in changing the policy tone.
Economists generally believe that if economic data continues its moderate trend in the coming months, the RBA may start a new round of rate cuts in the second half of the year to support employment and consumption. July's policy meeting will undoubtedly be the focus of the market.
Whether the RBA decides to cut rates immediately or not, the market has clearly signaled that inflation risks have eased, and the window for easing policies is about to open.
