Interest Rate Cuts 'on Table' as Inflation Stays Soft

Further interest rates cuts remain "on the table", Australia's central bank chief said Wednesday, as new official data showed that Australian consumer prices rose 0.7 percent in the three months to June, keeping annual inflation subdued.

Reserve Bank of Australia governor Glenn Stevens said weak economic growth had seen the cash rate decline to "very low levels".

"The question of whether they might be reduced further remains, as I have said before, on the table," Stevens said in a speech in Sydney.

"But in answering that question, it is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved."

The Consumer Price Index (CPI) increase in the second-quarter, driven by a rise in petrol prices, followed a 0.2 percent lift in the first three months of the year, the Australian Bureau of Statistics reported.

It took the annual headline rate of inflation to 1.5 percent.

The latest figures were broadly in line with market expectations, with economists forecasting a 0.8 percent rise for the period for an annual reading of 1.7 percent.

The Australian dollar rose slightly, buying 74.29 U.S. cents after the data was released.

Underlying or core inflation, which strips out volatile items and is more closely watched by the RBA, was 0.55 percent for the quarter to take the annual rate to 2.3 percent.

The annual core reading fell comfortably within the RBA's two to three percent inflation target band.

- Record-low interest rates -The central bank has slashed the cash rate by 50 basis points this year -- in February and May -- to take it to a new record-low of 2.0 percent to boost growth as Australia struggles to shift away from an unprecedented mining investment boom that has helped the economy avoid recession for more than two decades.

"In terms of what the RBA would do, this is middle-of-the-road, it doesn't change their assessment either way," JP Morgan's chief economist for Australia Stephen Walters told Agence France Presse of the CPI data.

"Inflation's been quite low for a while and that's why they've been cutting interest rates."

Fuel prices jumped 12.2 percent in the June quarter, while medical and hospital services rose 4.5 percent and new owner-occupier housing purchases by 1.5 percent.

The Australian economy has been subdued, with spending in non-mining sectors so far failing to fill the gap left by falling resources investment.

The unemployment rate has hovered around a decade-high of 6.0 percent over the past year and wages growth is weak.

Stevens said the labour market remained subdued but "appears to be better than we had expected three or six months ago".

"Employment growth has picked up noticeably, and hours worked have also increased," he said.

"The rate of unemployment is unchanged from a year ago, whereas we had been thinking it might be a little higher than this by now since growth in real GDP has been, according to the available statistics, below trend."

HSBC's chief economist for Australia Paul Bloxham said the recent signs of improvement in labor force and business conditions could leave the central bank with "little motivation for cutting rates at this point in time".