Softer-than-expected inflation figures for the June quarter have triggered hopes that there will be no more interest rate hikes in the current economic cycle. The headline inflation rate fell from 4 per cent to 3.8 per cent, while the all-important underlying rate was stable at 3.6 per cent. Both results were better than expected, and below the central bank's forecasts.

It had an immediate effect on financial markets. The ASX surged, the Aussie dollar fell back to 69.4 US cents and market interest rates, otherwise known as bond yields, also dropped.

Bond traders now ascribe just a three per cent chance of a rate hike at the August RBA meeting in less than two weeks. In quarterly terms, the underlying rate came in for the quarter at 0.8 per cent, which means it was slowing at the end of the 12-month period.

All the major bank economists are now forecasting no more rate rises this year, though they caution that inflation remains too high. If it doesn’t continue to recede, the Reserve Bank will have no option but to hike rates again.

Listen to today's episode 🎧 

Greed-o-meter

Source: AMP, ABS

Fear & Greed Q+A today

On yesterday's inflation numbers, the likelihood of an interest rate hike, and why we're living in a different inflation world now.

 

“We're getting so many different shocks now that the old way of thinking about inflation is becoming less useful. We've had tariffs, we've had two oil shocks in one year, and there's this rolling series of global disruptions.

 

The whole point of looking at services inflation and domestic inflation is to measure those persistent business cost pressures—things like wages, insurance and energy—but we're now operating in a genuinely price-destabilised world. I think the Reserve Bank has a hell of a problem on its hands because every new shock arrives on top of an already higher cost base. The idea that we're out of the woods on inflation is, in my view, a long way from reality.”

News in brief

The local share market hit a five-month high yesterday on the back of the inflation news. By the close the S&P/ASX 200 was up one per cent, finishing above 9,000 points. It hit an intraday high of almost 9,100 points and is sitting less than two per cent off its record high earlier in the year.

Banks paid $55 million to customers over two years to compensate for offset account failures, and more money is expected to be paid out to home buyers for mistakes made by the lenders.

Rio Tinto will pay its biggest half-year dividend in four years on the back of higher prices for copper and aluminium. Iron ore was the biggest contributor to the global miner’s $9.5 billion profit for the six months to the end of June, providing 43 per cent of underlying earnings.

Qantas’ Project Sunrise plane touched down in Toulouse, France to complete what appears to be a record-breaking flight after flying non-stop for 24 hours and 24 minutes on a trip from Melbourne.

The ACCC has given Australia Post the go-ahead to lift the cost of a letter to $1.85, from the current $1.70.

Fear-o-meter

AMP deputy chief economist Diana Mousina:

“We think the RBA can remain on hold at the upcoming August meeting, after [yesterday’s] June inflation coming out significantly better than their forecasts. Moreover, the RBA pays close attention to sticky services inflation components such as new dwelling costs, rents, and dining out, which have moderated somewhat in June.

“Coupled with slightly higher than expected unemployment rates in recent months, it could be argued that the three rate hikes are clearly working to bring down capacity pressures in the domestic economy.

“Finally, with oil prices remaining rangebound between $70 and $100 (well below the $100–120 range seen from March to May), the RBA clearly has 'some space' in August to wait and see whether rate hikes can further soften demand translate into more easing in inflation pressures.

"But in any given time, 3.6% inflation is hardly close to the target … and we still don’t see trimmed mean returning to around 2.5% until end next year.

“The unresolved Middle East war potentially puts even more pressures on fuel prices this time around (given that the world has been running down reserves), which could translate into more fuel surcharges across services, especially while consumer spending remains solid.

“And minimum and award wage increases of 4.75% from July, well above inflation, means the risk still tilts toward one further rate hike this year. Even though we might get a breather from hikes in August, expect the Reserve Bank to keep their hawkish stance and the potential for a rate rise in November.”

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