Australian Inflation Muted in 2Q

Australian Inflation Muted in 2Q

For all those punters panicking about the prospects of an interest rate increase being imposed by the Reserve Bank, the latest inflation data, should allow them the opportunity to chill for the time being.

"I am very comfortable with the current setting of policy, because it creates jobs", RBA Governor Philip Lowe said at a lunch event in Sydney.

Pound Sterling has risen against the Australian Dollar by over half a percent in the mid-week session as data out of Australia disappoints against analyst expectations.

According to the chief economist at CommSec, Craig James, not only were the prices of goods constrained over the period, but also the cost of services.

The consumer price index (CPI) rose 0.2 per cent in the second quarter and 1.9 percent for the year, well short of the 2.2 per cent increase expected. Investors reacted to the inflation news by paring an already slim chance of a hike, with interbank futures implying an 8 percent probability of a move by December.

The RBA has now been sidelined when it comes to moving the interest rate.

The annual inflation comes nearly at mid-range for the central bank goal of a 1-3%.

There is no United Kingdom or Australian data left for release today, but developments in the U.S. could significantly alter the balance of risks for the GBP/AUD exchange rate.

Hickie views concurred with James, and she believes that the figures released on Wednesday are not indicative of a "sustained pick-up" in underlying inflation as "GDP growth is likely to remain below potential again this year and next".

The latest Federal Open Market Committee (FOMC) meeting is highly unlikely to see any changes to policy, but with odds and expectations of an interest rate hike balanced on a knife edge, the subsequent commentary is likely to be highly scrutinised. The protracted period of subdued inflation led the central bank to cut interest rates to a record low of 1.5 percent previous year and it has been on hold ever since.

That is despite recent strength in the labour market.

Other indicators of the economy's health have also been generally positive, with a measure of business conditions jumping in the June quarter to its highest level since early 2008.

The Australian Treasuries have been closely following developments in oil markets due to their impact on inflation expectations. "We are seeking to do this in a way that supports sustainable growth in the economy and that best serves the public interest".



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