Weak inflation data dampens fears of interest rate hike: Economy Roundup

Prime Minister Julia Gillard and her advisers will no doubt be breathing easier after weaker-than-expected inflation data has effectively taken the pressure off the Reserve Bank of Australia to hand down a mid-election-campaign rate rise next week.

The data showed the underlying consumer price index (which measures the rate of inflation) rose by 0.5% in the June quarter, well below market expectations of a 0.7% increase. The underlying rate of inflation over the last 12 months was 2.7%, under the top end of the RBA’s target range of 2-3%.

ANZ chief economist Warren Hogan says the data means the RBA is now unlikely to raise rates next week at its August board meeting, although the longer-term outlook is less clear.

“The rise was even better than RBA forecasts in the last Statement on Monetary Policy and it means that the Bank will most likely leave policy unchanged at the August Board Meeting,” Hogan said in a statement.

“In the longer term, inflationary pressures should still persist and we expect the June quarter was the low point in the cycle. We continue to expect underlying inflation to rise to 3.5% by the end of next year and expect a stronger CPI result in the September quarter.

“Today’s result doesn’t change our view in that we expect the Bank to raise the cash rate twice (by 50 basis points in total) in the December quarter.”

That forecast would take the official cash rate to 5%.

The inflation data sent the Australian dollar down by almost 1%.

Shares flat at home and on Wall Street

There was no noticeable sharemarket reaction to the inflation data, with the benchmark S&P/ASX 200 down by just 0.1% at 12:05 AEST to 4492.4 points.

All the major banks share price rises below 1% in morning trade, while fellow majors BHP Billiton and Woolworths were also largely steady.

The big mover of the morning was construction firm Downer EDI, which saw its share jump 5.1% to $4.78 on news it had won $2 billion worth of mining contracts.

Over on Wall Street, the benchmark S&P 500 index fell 0.1%, snapping a three-day winning streak.

Economic data out of the US was mixed. While house prices actually rose in May, on-going concerns about unemployment saw consumer confidence fall to its lowest point since February.

The news was better from Europe, where share prices finished at a three-week high following the release of strong results from banking giant UBS.

BP replaces CEO

Also in Europe, embattled oil giant has formally announced that it will replace chief executive Tony Hayward with American executive Bob Dudley.

Dudley faces a difficult job in repairing the companies relationship with the US Government following the massive oil spill off the Gulf of Mexico.