Softer Inflation in Q2 Could Keep RBA on Hold

Australia's inflation has cooled down more than expected in the second quarter, according to Bank of America Securities. The bank estimated that headline inflation averaged about 4% in the second quarter, below the Reserve Bank of Australia's forecast of 4.8%. This softer reading on inflation could keep the RBA on hold at its next meeting.

The central bank's preferred 'trimmed mean' consumer price index (CPI), which strips out extreme moves to show the underlying trend, was estimated by BofA to be at 3.7% year over year, compared to the RBA's forecast of 3.8%. For June, BofA expects inflation to ease to 3.9% year over year for a third straight monthly cool-down.

The drop in auto fuel prices contributed significantly to this easing trend, with prices falling by 7.7% in June. However, the RBA is still waiting to see the full impact of its earlier rate hikes, which BofA thinks won't show up clearly until third-quarter inflation data. Therefore, softer readings strengthen the case for a pause.