Slower inflation changes picture

SYDNEY - Australian borrowers are likely to have a reprieve from an interest rate rise next week as a slower-than-expected rise in inflation would give the central bank some comfort, economists say.

Australia's headline consumer price index (CPI) rose 0.6 per cent in the June quarter, for an annual rate of 3.1 per cent, the Australian Bureau of Statistics (ABS) said yesterday.

Meanwhile, the underlying rate of inflation rose by 0.5 per cent in the quarter to an annual rate of 2.7 per cent, to fall within the Reserve Bank of Australia's target band of 2 to 3 per cent.

The median market forecast for headline CPI was a rise of 1.0 per cent in the June quarter for an annual rate of 3.4 per cent.

Economists had expected the average of the two underlying measures of inflation to rise by 0.8 per cent in the June quarter for an annual rate of 3.0 per cent.

Underlying inflation is the central bank's preferred measure of inflation as it excludes volatile price movements.

"Obviously a softer print right across the board with both headline, and more importantly, the core measures coming in at 0.5 per cent," RBC Capital Market senior economist Su-Lin Ong said.

"That is obviously the lowest print we have had in some time [for underlying inflation]."

The fall in the underlying inflation from 3.05 per cent in the March quarter to 2.7 per cent three months later would give the RBA some comfort, Ong said.

The RBA used monetary policy, or interest rates, to keep inflation within its target band over the economic cycle.

The current overnight cash rate is 4.5 per cent, following six rate rises from October 2009 and May this year.

"The odds are that inflation is not only coming below market expectations but also below the RBA forecasts," she said.

"In combination with a little bit of patchy data in Australia and an uncertain backdrop globally, that is going to see the RBA stay on the sidelines definitely next week and potentially this pause turns into an extended pause.

"They could well sit on the sidelines for the rest of this year."

ICAP Senior Economist Adam Carr said inflation moderated a lot more than anyone was expecting.

"In terms of the economy, it's probably good news," he said.

The Australian dollar fell half of one cent after the CPI figures were released.

- AAP