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Investing.com-- The Reserve Bank of Australia (RBA) is poised to cut interest rates by 25 basis points in July after May’s inflation reading came in softer than expected on Wednesday, Commonwealth Bank (CBA) economists said in a note.
Australia’s monthly CPI indicator rose just 2.1% year-on-year in May, below both CBA’s and consensus forecasts of 2.3%. The benign print follows April’s modest upside surprise and signals waning price pressures across the economy, the bank noted.
"Today’s monthly CPI print capped off a flow of data that should provide comfort to the RBA that a swifter return of the cash rate to neutral is both manageable and needed," said CBA economists.
"The decision to the cut the cash rate in July will still be a close one. We expect there to be a discussion of both leaving the cash rate on hold and cutting by 25bp," they added.
The report highlighted easing market services inflation and a reversal of April’s temporary spike in dwelling costs as key factors supporting imminent policy easing.
CBA forecasts the cash rate will fall to a neutral setting of around 3.35% before year-end, warning that maintaining restrictive settings risks pushing inflation below target.
"A wild card of course is the uncertain global environment which could also encourage the RBA to take the cash rate below neutral more quickly," CBA said.
Economists at ANZ Bank said that an initial assessment of the monthly inflation data suggests a touch of downside risk to their forecast for the Q2 CPI.
"There was deflation in the month across a range of recreation goods, as well as sharp deflation in holiday travel after Easter," ANZ added.