*

Australia Q2 CPI +1.0% q/q, +3.8% y/y, as expected

*

Core inflation slows a tad, welcome news for RBA

*

Markets give up rate hike wagers, back to pricing in cuts

(Adds analysts' comments in paragraphs 7-8 and 15-16,

Treasurer's comment in paragraphs 11-12)

SYDNEY, July 31 (Reuters) - Australian consumer price

inflation accelerated in the June quarter but a downside

surprise in core inflation led markets to abandon all thought of

further rate hikes and wager on an easing as early as November.

Data also showed retail sales topped forecasts in June but

sales volumes for the second quarter still declined, suggesting

tight monetary policy is working to constrain consumer demand.

Investors reacted by pushing the Australian dollar

0.7% lower to a three-month low of $0.6495. Three-year

bond futures rallied hard, up 22 ticks to 96.27. Swaps

moved back to pricing in cuts, implying a 50-50 chance for an

easing in November.

Data from the Australian Bureau of Statistics on Wednesday

showed the consumer price index (CPI) rose 1.0% in the June

quarter, matching market forecasts. CPI inflation picked up to

3.8% in the second quarter from a year earlier, up from 3.6% in

the first quarter.

For June alone, CPI also rose 3.8% compared to the same

month a year earlier.

Most importantly, a closely watched measure of core

inflation, the trimmed mean, rose 0.8% in the second quarter

from the previous quarter, below forecasts of 1.0%. The annual

pace slowed to 3.9% from 4.0%, the lowest since early 2022.

"Today's June Quarter CPI data should put to rest the tired

notion that the RBA should lift rates, an act that would do

nothing but tempt a recession," said Stephen Smith, a partner at

Deloitte Access Economics.

"Globally, interest rates are falling in many economies

that were hit by post-pandemic inflation spikes earlier than

Australia. This suggests Australia is a few months behind a

global trend of interest rates being reduced from recent highs."

The Reserve Bank of Australia has left interest rates at

4.35% for five straight meetings but policymakers were pondering

whether the current policy was restrictive enough after earlier

inflation data showed limited progress in cooling prices.

The slowdown in underlying inflation is music to the

ears of the RBA as it has been reluctant to hike due to worries

of a slump in the labour market. The jobless rate edged up to

4.1% in June, consumers reined in discretionary spending and

economic growth came to a virtual halt.

Treasurer Jim Chalmers welcomed the inflation figures.

"Inflation is sticky and stubborn in our economy as it has

been for other economies earlier in the year. It's been more

persistent than we'd like, but we have made substantial

progress," Chalmers said at a briefing in Brisbane.

The central bank has raised rates by 425 basis points

since May 2022 to tame runaway prices.

The dovish stance from other major central banks is taking

off pressure to hike further. The Federal Reserve is widely

expected to signal its intention to cut later in the day, while

the central banks in Canada, Europe and Switzerland have already

eased policy.

"We think the RBA will take some solace from

trimmed-mean inflation easing in Q2. Moreover, the Q3 print will

be softer due to cost-of-living subsidies announced in the last

Budget," said Sean Langcake, head of macroeconomic forecasting

for Oxford Economics Australia.

"Taking this with the ongoing slowdown in activity

indicators, we expect the RBA will keep rates on hold from

here."