Australia's inflation rate drops to 3.8%

Australia’s inflation rate dropped to 3.8% in the 12 months to June, according to the Australian Bureau of Statistics. Housing costs drove the annual increase for the month, while the trimmed mean inflation rate remained steady at 3.6%. The release of these figures serves as the final major economic indicator before the Reserve Bank of Australia’s upcoming monetary policy meeting.

Reserve Bank Governor Michele Bullock addresses the lag in monetary policy

Speaking at the Anika Foundation in Sydney, RBA Governor Michele Bullock acknowledged the time it takes for interest rate changes to affect the economy. She stated that since monetary policy operates with a lag, the full effects of this year’s cash rate increases have not yet been felt. A key issue in the period ahead is whether the tightening in monetary policy earlier in the year is sufficient to achieve the desired outcome, Bullock said.

Bullock emphasized that the board is prepared to act if necessary to meet its mandate. This includes potentially increasing the cash rate further. She noted that the board remains focused on preventing cost pressures from becoming entrenched, particularly against a backdrop of ongoing global supply shocks. Bullock added that some further easing in the growth of demand is likely required to bring inflation back down sustainably to target.

August meeting set to be decisive

Last week, Australian employment jumped by a substantial 76,300 jobs in June, significantly above the market consensus of 15,000 jobs creation. This labor market strength provides a backdrop for the upcoming RBA decision. HSBC chief economist Paul Bloxham noted that the August RBA meeting will be a live one, with the inflation jobs market still a little tight, despite being on a loosening trend.

Ben Samuel, a senior portfolio manager at First Sentier, suggested that the inflation print came in slightly below expectations and below the RBA’s latest forecast. Taken together with recent data and RBA commentary, a ‘give it time’ hold decision is likely for the RBA’s next meeting in August, Samuel said. Markets have reacted accordingly, with pricing now implying almost no chance of a hike in August, down from around a 20% likelihood immediately prior to the release.

BNY macro strategist Wee Khoon Chong argued that the data reinforced the view that inflation remains sticky, rather than signaling a decisive disinflation trend. Combined with a resilient labour market and a buoyant equity market, the Australian economy remains on a solid footing, Khoon Chong said. He added that while this should support the RBA’s hawkish bias, the data are not strong enough to justify a resumption of rate hikes.

The market reaction was negative, with front-end yields falling and the Australian dollar weakening.