Low inflation gives room for rate cut, but no trigger

The Reserve Bank of Australia has ample room to cut interest rates if needed following evidence that inflation was muted in the June quarter, but an August rate cut remains unlikely.

While the central bank appears in no rush to ease monetary policy from its already very-low 2.75 per cent, confirmation that headline inflation grew by just 0.4 per cent in the June quarter, pushing annual growth down by 0.1 of a percentage point to 2.4 per cent, suggests it could cut the cash rate further without immediately feeding a dangerous build-up in inflation.

But the Reserve Bank is likely to keep a wary eye on underlying price pressures, particularly as the weaker dollar means the cost of imports is set to grow more sharply.

Official figures show underlying inflation grew by 0.6 per cent in the June quarter, holding the annual rate steady at 2.4 per cent – just below the middle of the central bank’s 2 to 3 per cent target band.

The most significant price increases in the quarter were for hospitals and medical services (up 3.4 per cent), tobacco (3 per cent), furniture (4.8 per cent) and rents (1.1 per cent).

These were largely offset by falls in the cost of domestic tourism (down 4 per cent) and cheaper fuel (down 3 per cent).

There is nothing in the result that will surprise the RBA, which has said it expects inflation to remain “consistent with the target” for the foreseeable future.

The central bank is likely to closely monitor the evolution of inflation pressures from overseas following the rapid depreciation of the dollar since April.

This effect is yet to show up consistently in the official inflation numbers.

The average price of tradeable goods and services – which comprise about 40 per cent of the consumer price index – rose by just 0.3 per cent in the June quarter, while average inflation among non-tradeable products was 0.5 per cent, mainly due to the pick up in housing activity.

The extent to which the high dollar and fierce international competition has helped hold inflation down was underlined by figures showing tradeables inflation fell 0.7 per cent in the 12 months to June, compared with a 4.3 per cent rise in non-tradeable prices.

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