(April 30): Australia’s core inflation came in hotter than expected in the first three months, damping expectations of a rapid series of interest-rate cuts this year and sending the currency higher.
The closely-watched trimmed mean gauge of consumer prices, which shaves off volatile items, advanced 0.7% in the first quarter, from 0.5% three months earlier and compared with an expected 0.6% gain, data from the Australian Bureau of Statistics showed Wednesday. On an annual basis, it rose 2.9% versus a forecast 2.8% increase.
The Reserve Bank focuses on core inflation because government rebates are suppressing the headline figure, muddying its view of price pressures across the economy. Even though the annual number returned inside the RBA’s 2-3% target for the first time in three years, the result suggests the board “will remain cautious and data dependent,” according to Alex Joiner at IFM Investors.
“This is enough progress” to ease in May, said Joiner, chief economist at IFM. “But a follow up cut in July is not guaranteed, August seems a more likely option.”
The Australian dollar advanced and the yield on policy sensitive three-year bonds pared an earlier decline. Money markets are fully pricing in four rate cuts this year, starting in May, though they scaled back the chances of a fifth after the CPI report.
Wednesday’s data showed annual services price gains eased to 3.7% from 4.3% in the prior quarter, the weakest reading since mid-2022. Non-discretionary goods and services rose 1.8% on a quarterly basis, led by electricity, healthcare and education, while discretionary fell 0.2%, highlighting the squeeze on household balance sheets from cost-of-living pressures.
“Australia’s stronger-than-expected first-quarter CPI won’t stop the RBA from cutting rates at its May 19-20 meeting. But it does take a larger reduction of 40 or 50 basis points off the table,” said Bloomberg Economics.
Financial traders are betting the RBA will have to cut borrowing costs this year to help shield the economy from a US-led global trade upheaval. Governor Michele Bullock is yet to deliver a full accounting on the economic impact of US tariffs on Australia. She has called for patience in response to heightened “unpredictability” over the international outlook.
Earlier in the day, President Donald Trump flagged the possibility of another call with Australia’s leader Anthony Albanese to discuss US import levies. Trump imposed a broad 10% tariff on Australia in early April and his comments are the first public indication of trade talks between the two countries in more than two months.
With only around 4% of Australia’s goods exports by value flowing to the US, the direct impact of the tariffs on the broader economy is likely to be limited.
“More consequential for Australia is the impact of US tariffs on the Chinese economy, and how Chinese policymakers react,” said Pradeep Philip, head of Deloitte Access Economics. “Australian businesses and consumers haven’t forgotten the lessons from the pandemic and will be worried about supply chain disruptions, which could see prices rise.”
The inflation data and Trump’s tariff comment come as Australians head to the polls on Saturday with both sides of politics unveiling major spending initiatives to try to swing what’s expected to be a tight election. This week, S&P Global Ratings warned the nation’s prized AAA sovereign credit rating may be at risk if campaign pledges result in larger debt and deficits.
Wednesday’s inflation report also showed:
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