Australia's inflation hits 3.5-year low, greenlighting July rate cut

Australian consumer price inflation slowed more than expected in May, while the closely watched core measure hit three-and-a-half-year lows as investors locked in bets for an imminent rate cut.

- 

Swaps now imply a 92 per cent probability that the Reserve Bank of Australia would cut rates by a quarter-point when it delivers its policy decision on July 8, a day before the expiry of a 90-pause in US reciprocal tariffs on other countries. That was up from 818 before the data.

Commonwealth Bank of Australia, Deutsche Bank and TD Securities changed their next rate cut call to July from August, while UBS said its expectation for the RBA to hold steady next month is under review.

Wednesday’s report showed services inflation slowed to an annual rate of 3.3 per cent, from 4.1 per cent the previous month, while rents rose 4.5 per cent, the lowest annual growth since December 2022.

"Today's monthly CPI print capped off a flow of data that should provide comfort to the RBA that a swifter return of the cash rate to neutral is both manageable and needed," said Belinda Allen, a senior economist at CBA.

"Maintaining the current restrictive settings for too long raises the risk of inflation undershooting the midpoint."

Data from the Australian Bureau of Statistics on Wednesday showed the monthly consumer price index (CPI) rose 2.1 per cent in May compared with a year earlier. That was down from 2.4 per cent in April and under median forecasts of 2.3 per cent.

In the month, CPI fell 0.4 per cent from April as petrol prices eased and housing costs cooled.