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Australia Inflation Stays Below Target

Australia Inflation Stays Below TargetAustralia Inflation Stays Below Target

Inflation pressures in Australia were more subdued than expected during the first three months of this year, ensuring that interest rates stay on hold for some time to come.

Consumer prices rose 0.4% in the first quarter and were up 1.9% from a year earlier, the Australian Bureau of Statistics said Tuesday. Economists had expected inflation of 0.5% in the quarter and 2.0% from a year earlier, MarketWatch reported.

Economist at Westpac, Justin Smirk, said it was the 6th-straight quarter that inflation had disappointed expectations of the market. “The country’s economy appears locked in a low-inflation environment where sectors that are experiencing modest price gains—particularly housing, health and education—are offset by a competitive squeeze in consumer goods,” he said.

“There’s no signs of a broader cyclical upswing in prices that one would normally expect to see at this stage of an economic cycle,” Smirk added.

Still, other economists noted there was some flicker of life in core inflation which rose to 2.0% on-year, reaching the lower end of the Reserve Bank of Australia’s target band of 2-3%.

Core inflation has nudged higher since late 2016, when it was running at around 1.5%. Still, higher core inflation falls short of conditions needed to raise interest rates.

Wages growth remains contained, and until that heats up, inflation will remain low and the RBA will be content to keep interest rates on hold.

Reserve Bank of Australia Governor Philip Lowe recently signaled the next move in interest rates is likely to be higher, but added that it could be a while before the case to tap on the brakes becomes clear.

However, Su-Lin Ong, head of economics at RBC Capital Markets said there may be scope for the RBA to raise its inflation forecasts in a quarterly policy statement due on May 4.

Higher costs for education, natural gas and household fuels, vegetables, pharmaceuticals and medical services contributed to the rise in consumer prices during the quarter, offset by lower travel, computing and furniture costs, the Australian Bureau of Statistics said.

Current financial market pricing reflects an expectation that interest rates will be unchanged until 2019.

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