A Decline in Australian Inflation Strengthens the Argument for a Rate Pause

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Australian inflation decelerated in February more than economists had predicted, driven mainly by a decline in housing construction costs.

The Reserve Bank of Australia (RBA) is widely expected to leave interest rates unchanged at a policy meeting next week, given this data on inflation and mixed economic signals from other sectors such as retail sales and employment growth.

Recent surveys have shown weak business confidence due to concerns about global trade tensions and uncertainty around domestic policies such as tax reform.

Jessica Ren, a strategist at Westpac Banking Corp. in Sydney, said, “Markets were already quite convinced with the story of an April pause, given what’s happening globally. But this adds to the story.”

The Australian dollar and government bonds yields fell after the nation’s monthly consumer price index data released Wednesday showed a slower pace of inflation. The annual inflation rate decelerated to 6.8% in February from 7.4% in January.

The Consumer Price Index (CPI) report released earlier was the final data point that the Reserve Bank of Australia needed to assess its economic outlook ahead of its April 4 policy meeting.

The board has raised interest rates by 3.5 percentage points since May, and the latest inflation figures could influence their decision to keep rates unchanged or make further adjustments.

Analysts agree that the slower pace of inflation bolsters the case for a rate pause next week, given mixed signals from other sectors, such as retail sales and employment growth.

Analysts also noted that while inflation remains within the RBA’s target range, underlying measures remain below expectations which could lead to further rate cuts if needed to stimulate economic activity over the coming months.

The central bank will be closely watching labour market figures due out later this month before deciding whether to hold or cut rates next week.

Still, consumer prices are heading down, which should relieve households struggling with rising living costs amid sluggish wage growth in recent years.

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