SHOW-STOPPER: Markets are split on whether the RBA will cut in August

Photo: Alan Crowhurst/ Getty Images)

Australia’s June quarter inflation report has created more questions than answers on the outlook for Australian interest rates.

At 0.45%, the quarterly increase in core inflation was slightly ahead of expectations, leaving the year-on-year rate at a record-low level of 1.50%.

Despite this, the year-on-year rate was above expectations for an increase of 1.4%. It was also bang in line with forecasts offered by the RBA in May.

The small beat in core inflation has created doubts as to whether the RBA will cut interest rates, at least in the near-term. Financial markets reflect this view, trimming the odds of a rate cut on August 2 to around 50%, down from 67% seen before the CPI report was released.

The chart below, tracking the percentage odds of a 25 basis point rate cut being delivered based on cash rate futures pricing, clearly shows the scaling back of market expectations following the CPI report.

Looking further ahead, futures are fully priced for a rate cut to be delivered at the RBA’s November policy meeting.

Still, with markets 50/50 near-term, it means that the RBA’s August policy meeting — just six days away — will almost certainly be a show-stopper, one way or another.

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