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Australia inflation slowed less than expected in Q1, hurting rate cut expectations

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 rose by 1% in the first quarter, surpassing market forecasts of 0.8%. Despite expectations for a slowdown, the increase was higher than anticipated.

While the annual pace of CPI inflation slowed to 3.6% from 4.1%, primarily due to base effects, it still exceeded forecasts for a decrease to 3.5%. This indicates that inflationary pressures remain elevated.

The trimmed mean, a key measure of core inflation, rose by 1% in the first quarter, again surpassing forecasts. However, the annual pace of core inflation slowed to 4% from 4.2%.

The data led markets to abandon hopes for any rate cuts this year, with expectations for a rate hike by August minimized. Economists now project the first rate cut to occur in November, contingent on future economic data. If indicators do not show significant deceleration in the second quarter, there may be a possibility of rate cuts being pushed into next year.

The Reserve Bank of Australia (RBA) has maintained interest rates at 4.35% for three consecutive meetings, reflecting confidence that inflation will eventually ease back to its target band of 2-3% by late 2025. The RBA had previously raised borrowing costs by 425 basis points since May 2022.

The fading expectations for rate cuts in Australia align with a global trend, as major central banks, including the US Federal Reserve, have adjusted their initial forecasts. Many central banks encountered stronger-than-expected obstacles in their efforts to push inflation back to target levels.

Overall, the latest inflation data in Australia has led to a reassessment of rate cut expectations, with policymakers closely monitoring economic indicators to determine future policy actions. The persistence of inflationary pressures, particularly in service costs, presents a challenge for achieving the RBA’s inflation target within the desired timeframe.