Core inflation in Q2 falling giving the green light for a rate cut, the Australian central bank's easing in August becoming more certain.

Australia's core inflation rate for the June quarter has fallen slightly. With signs of easing price pressures becoming increasingly apparent, this provides the Australian central bank with more reasons to initiate monetary policy easing as early as August. Data released by the Australian Bureau of Statistics on Wednesday showed that the trimmed mean consumer price index (which excludes items with high volatility) rose by 0.6% quarter-on-quarter in the second quarter, lower than the expected 0.7%; it rose by 2.7% year-on-year, meeting expectations, but slightly lower than the 2.9% in the first quarter. Due to government subsidies lowering overall inflation data and blurring the assessment of overall economic price pressures, the Australian central bank is more focused on core inflation indicators. The core inflation rate had only just fallen to the bank's target range of 2%-3% in the first quarter, and further decline now signifies that policymakers may shift their focus from suppressing inflation to supporting economic growth. After the data was released, the Australian dollar gave up its earlier gains, the yield on the 3-year policy-sensitive government bond continued to fall, and traders have fully bet on the Australian central bank cutting interest rates next month, causing the stock market to rise in response. Lucy Ellis, Chief Economist at The Pacific Bank, stated: "The current data shows that monetary policy no longer needs to be restrictive." She expects the Australian central bank to announce a 25 basis point rate cut at the August 11-12 meeting, and noted, "We believe today's data may give the central bank some relief." In this easing cycle, the Australian central bank has already cut interest rates twice, bringing the cash rate to 0.85%. Earlier this month, contrary to market expectations, the bank maintained borrowing costs, catching investors off guard. According to a Bloomberg survey, economists generally expect the central bank to cut rates three more times by early 2026. Some analysts point out that the recent softening of the job market is one of the worrying factors - data earlier this month showed that Australia's unemployment rate rose from 4.1% in May to 4.3% in June, reaching a four-year high. After the employment data was released, RBA Governor Michelle Brock stated last week that the current unemployment rate is consistent with the bank's forecast in May, and added that the Monetary Policy Committee believes a "gradual, cautious" easing pace is appropriate. The market will closely watch the Australian central bank's interpretation of this inflation report - Deputy Governor Andrew Holz will deliver a speech on this inflation report at a "fireside chat" event in Sydney on Thursday. James McIntyre, economist at Bloomberg Economics, stated: "We believe that the latest inflation data indicates that the Australian central bank will continue to cut at a gradual pace. We expect a 25 basis point rate cut in August and November, with further easing in 2026." Data released on Wednesday also showed that the annual increase in service prices fell from 3.7% to 3.3%, the lowest in three years, mainly driven by a decline in rent and insurance prices. The Australian Bureau of Statistics pointed out that non-essential goods and services prices rose by 2.4% year-on-year, led by international travel, clothing, and furniture; essential goods prices rose by 1.8% year-on-year, mainly driven by fruits and vegetables, electricity, and rent. Alex Joiner, Chief Economist at IFM Investors, stated: "We believe this progress in inflation is enough to alleviate concerns about short-term rebound risks for the board. Coupled with the possibly ongoing soft labor market, the central bank is likely to continue pushing for monetary policy easing in August." The inflation report also showed that the overall price increase was mainly driven by housing and healthcare expenses; a drop in international oil prices led to a decrease in automobile fuel prices, partially offsetting the previous increase; non-tradable goods prices (mainly influenced by domestic factors such as utilities and rent) rose by 0.7% quarter-on-quarter; tradable goods prices (usually influenced by exchange rates and global factors) rose by 1% quarter-on-quarter; a shortage caused by avian influenza led to a 19.1% year-on-year increase in egg prices; coffee, tea, and cocoa prices rose, further pushing up non-alcoholic beverage prices.