Australia’s inflation rate slowed down more than anticipated in the month of July, reflecting global trends and strengthening the case for the Reserve Bank of Australia (RBA) to extend a pause in raising interest rates at next week’s policy meeting. The consumer price index rose 4.9% in July from a year earlier, compared with economists’ estimate of 5.2%, according to the Australian Bureau of Statistics (ABS) data released on Wednesday. This was the third consecutive slowdown in the annual inflation rate, with the RBA predicting that inflation will fall back inside its 2-3% target range by late-2025.
The cooling of prices will be welcomed by RBA Governor Philip Lowe, who has put the central bank in data-dependent mode after raising interest rates 12 times since May 2022. Expectations that the result will allow the RBA to stand pat on Tuesday saw the Australian dollar extend losses and the yield on policy-sensitive three-year bonds fall, while stocks rose.
Government Rebates Help Offset Energy Costs
The easing in consumer price gains was aided by government handouts to help offset rising energy costs. “If we exclude the impact of rebates from the July 2023 figures, electricity prices would have recorded a monthly increase of 19.2%,” said Michelle Marquardt, ABS head of prices statistics. By contrast, they climbed 15.7% in the 12 months through July.
The data comes after US consumer prices rose modestly, marking the smallest back-to-back gains in more than two years. Australia’s CPI reading follows reports suggesting its economy remains resilient, putting the central bank on track to engineer a soft landing.
RBA Moves at a Cautious Pace
The RBA has moved at a more cautious pace than global counterparts, having raised rates by 4 percentage points compared with 5.25 each by New Zealand and the US. The central bank paused this month to assess the impact of its tightening campaign amid a mixed economic picture — consumers have slowed spending as they are forced to allocate a rising proportion of their incomes to repayments while corporate confidence is still holding up.
Retail sales data earlier this week showed household spending exceeded expectations in July, though on an annual basis consumption has flatlined. On the flip side, the labor market persists in defying the RBA’s rate hikes with hiring staying strong and the jobless rate holding in a 3.5-3.7% range over the past year.
What’s Next for the RBA?
The RBA will announce its next policy decision on Tuesday, September 5, and most analysts expect it to keep the cash rate unchanged at 4.1%. The central bank will also release its updated quarterly economic forecasts on Friday, September 8, which will provide more insight into its outlook for inflation and growth.
Some economists, however, think that the RBA may resume its tightening cycle sooner than later, given the persistent strength of the labor market and the potential for wage pressures to build up. “We continue to expect another rate hike before year-end,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc. “The key question for us is whether wages growth will pick up enough to lift underlying inflation back into the target band over time.”