Much will depend on Wednesday’s official inflation figures, but at this stage financial markets are putting a 60 per cent chance of the cash rate being cut to 1.5 per cent when the central bank holds its August 2 board meeting.
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The consumer price index rose just 0.4 per cent in the June quarter, dragging the annual rate down to just 1 per cent and well below the central bank’s 2-3 per cent inflation target band.
“Underlying inflation in line with expectations would reinforce the weak trend, and in combination with softer labour and housing markets and a relatively elevated AUD, would be sufficient reasons for the RBA to cut”, said Felicity Emmett, head of Australian economics at ANZ.
Second-quarter CPI probably rose 0.4 per cent from the previous quarter when it fell 0.2 per cent, according to median estimate in a Bloomberg survey.
“The annual rate for core inflation remains steady at around 1.5 per cent, so it’s a continued undershoot of the inflation target”.
Yields on three-year government paper AU3YT=RR stood at 1.56 percent, well under the overnight rate, while the local dollar AUD=D4 was little changed at $0.7515.
Adding to the disinflationary trend is a price war in the retail sector as foreign entrants shake up the market and weakness in rents amid a record pipeline of new apartments.
On the other hand, few analysts believe that a slight increase of even 0.6 percent or higher may posit the RBA to pause on rate cuts for a while a result of 0.4 percent or less will shatter all hopes.
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The Aussie dollar is a little firmer after the release of the second quarter inflation data this morning.
