Australia’s inflation eased less than anticipated in the first quarter, dampening hopes for a rate cut

On Apr 24, 2024

Australian consumer price inflation moderated less than expected in the first quarter, largely due to persistent pressures on service costs, which disappointed policymakers. Here’s a summary of the recent developments:

The Australian Consumer Price Index (CPI) increased by 1% in the first quarter, surpassing market expectations of 0.8%. Despite forecasts for a slowdown, the increase was higher than anticipated.
Although the annual pace of CPI inflation decreased to 3.6% from 4.1%, largely due to base effects, it still exceeded predictions of a drop to 3.5%. This suggests that inflationary pressures remain elevated.
The trimmed mean, a key measure of core inflation, also rose by 1% in the first quarter, exceeding forecasts. The annual rate of core inflation eased slightly to 4% from 4.2%.
This data led markets to abandon hopes for any rate cuts this year, with expectations for a rate hike by August reduced. Economists now predict the first rate cut to happen in November, depending on future economic data. If there is no significant deceleration in the second quarter, rate cuts may be delayed until next year.
The Reserve Bank of Australia (RBA) has kept interest rates at 4.35% for three consecutive meetings, reflecting confidence that inflation will return to its target range of 2-3% by late 2025. The RBA previously raised borrowing costs by 425 basis points since May 2022.
The diminished expectations for rate cuts in Australia align with a global trend, as major central banks, including the U.S. Federal Reserve, have adjusted their initial forecasts due to stronger-than-expected challenges in lowering inflation to target levels.

Overall, the recent inflation data in Australia has prompted a reassessment of rate cut expectations, with policymakers keeping a close eye on economic indicators to guide future policy decisions. The persistence of inflationary pressures, particularly in service costs, presents a challenge for the RBA in achieving its inflation target within the desired timeframe.