Australia’s inflation rate has eased again, bolstering expectations the Reserve Bank will lower the cash rate next month and bring further reprieve for mortgage holders.
The headline inflation rate was 2.1% in the 12 months to May, down sharply on the previous month’s figure of 2.4%, according to consumer price index figures released on Wednesday.
KPMG’s chief economist, Brendan Rynne, said there was a “continued pattern of deflation across the Australian economy”.
“This could provide comfort to the Reserve Bank at its next meeting, knowing that any cut to the cash rate will occur in a stable inflationary environment,” Rynne said.
Krishna Bhimavarapu, economist at State Street Global Advisors, said: “We are convinced that the RBA needs to cut in July to safeguard growth as inflation is clearly out of their way now.”
Falling petrol prices, down 10% over the past 12 months, have helped ease costs for motorists and also put downward pressure on inflation figures, according to the CPI data.
While advertised rents are still rising by 4.5% a year, the pace of increases has slowed to levels last recorded in late 2022.
The treasurer, Jim Chalmers, said the country had made a “hell of a lot of progress”.
“I’m reluctant to say it’s mission accomplished but we are certainly making more progress than what we expected,” Chalmers said.
While the monthly result can be volatile and is viewed as less authoritative than quarterly figures, the steep fall has pushed inflation towards the bottom of the RBA’s 2-3% target range.
The RBA’s preferred CPI measure, the “trimmed mean” or underlying inflation rate that strips out volatile items and various government subsidies, decreased to 2.4% from 2.8%.
Markets upped their bets on a rate cut after the data was released, with traders now indicating near consensus support for a quarter point cut on 8 July. In total, traders expect three more rate cuts this year.
While further rate cuts will be welcomed by mortgage holders and increase the borrowing capacity of buyers, any reduction in borrowing rates is expected to fuel another surge in property prices, making homes more unaffordable.
The country’s biggest mortgage lender, Commonwealth Bank, brought forward its next rate cut forecast from August to July in response to the new inflation data.
“The decision to cut the cash rate in July will still be a close one,” CBA senior economist Belinda Allen said.
“We expect there to be a discussion of both leaving the cash rate on hold and cutting by 25 basis points.”
ANZ economist Madeline Dunk said the July meeting would be a “close call”.
“It’s going to be a pretty tough decision and it really depends on how concerned the RBA is about what’s been happening globally,” Dunk said.
She said the disruption caused by the initial US tariff announcements had faded, giving economic activity a chance to stabilise.
Oil markets also calmed this week after a pause in hostilities between Israel and Iran, which reduced the risk of another surge in global inflation.
