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The chances of rate cut in Australia increased significantly following the weak CPI. AUD/USD already got a blow from the release of the CPI, but a rate cut isn’t fully priced in. More significant falls depend on the actual cut and its size.

Australia publishes official house price figures only once per quarter. During each quarter, there are unofficial releases such as the MI Inflation Gauge that provide some insight. The signs of weaker inflation were seen, but the official release was important, given the surprise.

Australia’s consumer price index rose by 0.6% in Q3, as expected, and lower than the 0.9% seen in Q2. The bigger surprise came from Trimmed Mean CPI which rose by only 0.3%, less than half of the 0.7% predicted. This figure, similar to Core CPI in other countries, shows that inflation is slowing down and that economy is in a similar state.

Rate Cut Prospects

Australia currently has a very high interest rate of 4.75%. Other major Western countries are far behind. The raise to this level occurred in November 2010. The RBA hasn’t moved since then.

The slowdown in inflation opens the door for Glenn Stevens to cut the rate for the first time since February 2010. The upcoming rate decision is on November 1st at 3:30 GMT.

And there’s another reason to cut the rates: the housing sector is undergoing a downturn. Some say that the Australian real estate bubble is bursting. Some see it as cyclical drop in prices. In both cases, it’s not a temporary drop. AIG’s Construction Index is below 40 points for a long time. 50 points separate growth and contraction. The sector is down under.

It’s important to note that the head of the RBA, Glenn Stevens, tends to surprise the markets from time to time. Given the busy week with US and European rate decisions and the G-20 Summit, Stevens could wait for another month. On the other hand, a rate cut of 0.50% cannot be ruled out.

AUD/USD

The surprisingly low CPI hit the Aussie, but it returned to the range and returned to trade according to the headlines coming out of Europe. A rate cut of 0.25% would hurt it and keep it more muted. A cut of 0.50% would send it much lower for quite some time.

For more on the Aussie, see the AUD/USD forecast.

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