SYDNEY, July 26 (Reuters) - Australian inflation slowed more than expected in the second quarter thanks to falls in the cost of domestic holidays and petrol, suggesting less pressure for another hike in interest rates and sending the local dollar sharply lower.
Investors reacted by lengthening the odds on the Reserve Bank of Australia (RBA) increasing rates at its meeting next week, with futures now pricing in a roughly 25% chance of a quarter point hike, compared with 50% before the data.
Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 0.8% in the second quarter, the smallest gain since the third quarter of 2021 and under market forecasts of 1.0%.
The annual pace slowed to 6.0%, from 7.0%, and was again below forecasts of 6.2%. For June alone, the CPI rose 5.4% year-on-year, down from 5.5% in May.
A closely watched measure of core inflation, the trimmed mean, rose 0.9% in the June quarter, pushing the annual pace down to 5.9% and just under forecasts of 6.0%.
"While there are still concerns around the labour cost outlook, we think these data will buy the RBA some more time and allow them to keep rates on hold a little longer," said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.
The Australian dollar slid 0.7% after the data to $0.6746, while three year bond futures gained 10 ticks to 96.13.
One worrying sign is that services inflation, which policymakers have feared would be sticky, accelerated to a fresh 22-year high of 6.3% in the second quarter. That was balanced by a sharp fall in goods inflation.
Still, inflation remains far above the RBA's target band of 2-3% and is currently projected to only return to the top of the bank's target by mid-2025. The RBA will release its updated economic forecasts next week.
Defying a whopping 400 basis point increase in rates so far, the labour market has remained drum-tight, with the economy adding more jobs than expected in June and the jobless rate staying near 50-year lows.
The RBA has warned that some further tightening may be required to bring inflation to heel. (Reporting by Stella QiuWayne Cole; Editing by Jacqueline Wong & Shri Navaratnam)
