Australia: May Inflation Drop Supports Expectation of Unchanged Policy Rates in July

Australia: May inflation drop should be enough to keep policy rates unchanged in July

If the June Reserve Bank of Australia (RBA) rate decision was a finely balanced one, pushed over the edge by a spike in April's inflation to 6.8% YoY, then by the same logic, the plunge in inflation in May should result in a "hold" decision in July.

 

May inflation plunges

With only retail sales and home loan data due before the next RBA decision on 4 July, it looks extremely unlikely that Governor Lowe and his colleagues will be able to do anything other than hold rates steady at that meeting. 

We had expected a decent pullback in the inflation rate in May due to base effects from last year, as well as lower retail gasoline prices. But the adjustment was much more dramatic than we or the consensus had envisioned. At -0.26% MoM (our calculations), the CPI index fell considerably more than seemed likely, even with transport costs dropping 2% thanks to a 6.7% MoM decline in motor fuel. What we had not bargained on, was a 0.2% MoM fall in tobacco prices, a 1.9% MoM reversal in last month's clothing price gains, and a 4.4% MoM reduction in recreation costs, driven by an 11.1% fall in holidays (hotel room rates and airline tickets most likely). 

That resulted in not only a fall in the headline rate of inflation but also pulled the measure excluding volatile items down to 6.1%YoY from 6.8% - a very healthy fall.  

 

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