Australia core CPI inflation softens in Q2, dents rate hike bets

Investing.com-- Australian consumer price index inflation grew as expected in the second quarter, while softer-than-expected core inflation drove up bets that the Reserve Bank will not hike interest rates any further.

CPI inflation grew 3.8% year-on-year in the three months to June 30, data from the Australian Bureau of Statistics showed on Wednesday. The reading was in line with expectations and picked up from the 3.6% seen in the prior quarter.

Underlying inflation- which excludes the impact of volatile items such as fresh food and fuel, fell to 3.9% from 4%. The reading is closely watched by the RBA in considering monetary policy.

Quarter-on-quarter CPI inflation grew 1% as expected, while also remaining steady from the prior quarter. Core CPI inflation grew 0.8%, less than expectations of 1%. 

Wednesday’s reading showed that while inflation did increase in the second quarter, it showed some signs of eventual cooling, especially with the drop in underlying inflation.

A monthly CPI indicator for June also showed inflation falling to 3.8% from 4.0%, as expected.

The reading ramped up bets that the RBA will have no impetus to hike interest rates further. Australian stocks surged on this notion, with the ASX 200 rallying 1.2% and coming close to record highs.

On the other hand, the Australian dollar weakened sharply, with the AUDUSD pair sliding 0.6% to a three-month low, tracking a decline in bond yields.

A raft of stronger-than-expected CPI readings in recent months had driven up expectations that the RBA will have more impetus to raise interest rates further. The central bank had also put up a hawkish stance in the face of sticky inflation.

But while Wednesday's reading diminishes the prospect of more rate hikes, relatively sticky inflation is likely to see the RBA keep interest rates higher for longer. Core inflation remained well above the RBA's 2% annual target.

Other readings showed some resilience in the Australian economy. Australian retail sales grew more than expected, at 0.5% month-on-month in June, compared to expectations of 0.2%.