Australia inflation surprisingly soft, lengthens odds on rate hike

Australia inflation surprisingly soft, lengthens odds on rate hike

On Monday afternoon the local dollar was fetching US79.22 cents, still too high for the RBA's liking but better than last week when it nearly hit US80 cents.

"We expect the Q2 CPI to confirm that inflationary pressures have stabilized, although we continue to see only a very gradual lift from here", ANZ senior economist Jo Masters said.

But pessimism from the Fed may push the Australian Dollar higher as markets switch from safe-havens to risk assets. We are seeking to do this in a way that supports sustainable growth in the economy and that best serves the public interest.

"Recent events suggest the RBA is paving the way for higher rates in the future, but they won't be eager to make any snap judgements, or to upset a delicate debt situation by chasing an inflation target", he said.

While the Federal Reserve has started hiking interest rates and the European Central Bank is considering pulling the plug on QE, those decisions have "no automatic implications for monetary policy in Australia", he said.

"Rates clearly aren't rising until the RBA is confident that wages growth and inflation are lifting", she said. On a yearly basis, CPI fell to 1.9%, surprising analysts who anticipated that inflation would climb to 2.2% from 2.1% in the previous quarter.

That's all well and good and might happen but in the meantime those hedge funds are happy to sell the United States dollar.

The Australian Dollar briefly paused its rally against its major counterparts to digest some Chinese industrial profits data.

Forex traders will also keep an eye on this Friday's initial reading on the pace of growth in the U.S. economy for the three months to June.

The main price increases last quarter were in health care, taxes on tobacco and the cost of buying a house.

The Australian dollar was at 80.38 United States cents at 1700 AEST, up from 78.91 U.S. cents on Wednesday.

Then there is Australia's own inflation report slated to be released on Wednesday.

But a higher reading will have more impact.

"We are intent on delivering Australians an average rate of inflation over time of between 2 and 3 per cent".

Still, most forecasts are for the currency to fall, not rise.

The listless data took the wind out of the Australian dollar's sails.

But they say it won't last due to a few reasons.

'Elsewhere in the world, some central banks are now starting to increase interest rates and others are considering when to withdraw some of the monetary stimulus that has been put in place.

Year-on-year price growth softened to 1.9% from 2.1%, against expectations of an uptick to 2.1%.