By Stella Qiu
SYDNEY (Reuters) -Core inflation in Australia slowed to a three-year low in the first quarter as costs in the services sector cooled markedly, data showed on Wednesday, supporting the case for another cut in interest rates in coming weeks.
Investors are fully expecting a quarter-point rate cut from the Reserve Bank of Australia on May 20 given the darkening outlook for global growth caused largely by U.S. tariffs, even as a stronger-than-expected reading in headline inflation saw some scale back aggressive bets for five rate cuts this year.
Data from the Australian Bureau of Statistics showed the consumer price index (CPI) rose 0.9% in the March quarter, just above forecasts of a 0.8% increase. That was thanks to a 16.3% jump in electricity prices as some government rebates on power bills expired.
Annual CPI inflation held steady at 2.4%.
The key trimmed mean measure of core inflation increased by 0.7% in the quarter, again above forecasts of a 0.6% gain. The annual pace, however, slowed to a three-year-low of 2.9%, down from 3.3%, taking it back into the Reserve Bank of Australia’s 2% to 3% target band for the first time since late 2021.
Also encouragingly, inflation in the services sector slowed to 3.7% in the first quarter, the lowest since the June quarter of 2022.
The benign core inflation readings would be a positive for Prime Minister Anthony Albanese, whose Labor Party is running on the credentials of bringing down sky-high inflation ahead of a tight federal election on Saturday.
Indeed, Treasurer Jim Chalmers said he did not see anything in the figures that would substantially alter market expectations for more easing in moneatry policy.
Tony Sycamore, an analyst at IG, said downside risks to global growth and a softer near-term inflation profile meant the RBA was likely to focus on the downside risks to growth and cut interest rates by 25 basis points in May.
Pradeep Philip, head of Deloitte Access Economics, agreed.
“A May rate cut should not be viewed as the RBA declaring ‘mission accomplished’ in the fight against inflation. Instead, it should be viewed as insurance against any collateral damage a trade war and geopolitical turbulence may cause the Australian economy.”
The RBA skipped a chance to move in April but opened the door to a rate cut next month by noting the May meeting would be an opportunity to revisit monetary policy settings.
It has noted that impact from U.S. tariffs on local inflation is less clear, with supply factors likely boosting prices but possible trade diversion also putting downward pressures on inflation.
The RBA has also worried about the strength of the labour market that may risk stoking inflationary pressures, but the main measure of wage growth has been slowing even as employment galloped ahead and the jobless rate held at a historical low of 4.1%.
Wednesday’s data showed educational costs jumped 5.7% in the first quarter, but price gains for insurance costs eased substantially to 7.6% from double digit growths in the past quarters.
New dwelling construction costs rose 1.4% in the March quarter, the lowest since the June quarter 2021.
(Reporting by Stella Qiu and Wayne Cole; Editing by Christopher Cushing and Lincoln Feast.)
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