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Weak CPI means RBA could cut

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An inflation reading just below market expectations could prompt a cash rate cut from the central bank, but probably not at its next meeting, economists say.

The consumer price index (CPI) rose 0.5 per cent in Australia in the June quarter, for an annual inflation rate of 1.2 per cent, down from 1.6 per cent in the year to March, the Australian Bureau of Statistics said on Wednesday.

Economists had forecast a headline CPI rise of 0.6 per cent in the quarter, for an annual pace of 1.3 per cent, at the bottom end of the Reserve Bank of Australia’s target range of two to three per cent.

For underlying inflation, the median forecast was 0.6 per cent for the quarter and 1.9 per cent over the year.

The latest official forecast from the RBA, in May was for annual inflation of 1.75 per cent for the year to June 2012.

CommSec economist Savanth Sebastian said the reading gave scope for another rate cut from the RBA.

“Even if you look at all the underlying measures, it suggests that inflation is well and truly contained,” he said.

“It looks like the Reserve Bank has the avenue of putting inflation at the sidelines and focus on stimulating the economy if necessary.”

However, Mr Sebastian said the RBA would not be likely to cut at its next meeting in August, but would look to further domestic data for guidance.

HSBC chief economist Paul Bloxham said the inflation figures were broadly in line with expectations and allowed for more cash rate cuts if needed.

“The trimmed mean is sitting at the bottom end of the RBA’s target band in both year ended terms and in quarterly terms,” Mr Bloxham said

“So it certainly looks as if the RBA has room to move (the cash rate from its current level of 3.5 per cent) if it has to, but we also know they seem to have a bit of patience at the moment.

“The timing of the next move will depend a lot on what happens globally.”

The central bank says the trimmed-mean rate of inflation is defined as the average rate of inflation after trimming away a certain percentage of the distribution of price changes at the high and low ends of that distribution.