Headline CPI rises in Australia, dimming prospects for May rate cut

The Australian dollar was boosted versus the greenback on Wednesday after the release of Australian inflation numbers.

The underlying inflation number was slightly higher than what most people expected. The headline consumer price index (CPI) inched up 0.2 percent in the first quarter, while the annual pace of inflation slowed to 1.3 percent from 1.7 percent, matching expectations.

The rise in core inflation dimmed prospects for a cut in interest rates next week on May 5th. By the Reserve Bank of Australia.

The Aussie rose a quarter of a U.S. cent in reaction to the slightly higher reading for underlying inflation.

The following are some comments from economists in reaction to the CPI data today:

David de Garis, a senior economists at National Australia Bank said:

“The underlying is towards the upper end of market and the RBA’s expectations they outlined in their February statement, they forecast 2.25 percent year-end underlying inflation to June so at the moment it’s tracking at or a bit above that.

“It’s certainly not a soft number and arguably a tad stronger than they expected and it’s certainly not evidence the economy is softer, if anything it adds more to the okay picture of the economy they have seen.

“It probably reduces the risk a little bit more that they will ease in May…the case (for easing) hasn’t disappeared, it’s a longish game but it certainly reduces the chance a little bit more for May anyway.”

Tom Kennedy, an economist at JP Morgan said:

“There weren’t too many surprises today … Heading in, we had May for an RBA rate cut, that was in line with most economist surveys. We’ll take look at our forecast, but there’s nothing really in the figures today that will change our view on that.

“But May will be a very close call, there will be arguments for the RBA to remain on hold and also arguments for the RBA to cut again. They’ve got scope (to cut) with inflation quite low and the data has been OK recently, but over the longer term the trend is quite poor so we thing there is enough evidence to get them over the line.

“Once oil moves higher we should start to see CPI return to the target band. We think CPI will incrementally firm soon, we’re at the low point now and you should see CPI move higher in the next two or three quarters.”

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