Market experts largely agree that the Reserve Bank of Australia (RBA) is unlikely to consider raising interest rates at its next meeting after the latest price indicator showed inflation, though sticky, appears to be improving.

The Consumer Price Index (CPI) rose 1% in the June quarter and 3.8% year-on-year, according to the latest data from the Australian Bureau of Statistics, broadly in line with market expectations.

The three-month discounted average, seen as a key core gauge of inflation, surprised at 3.9% year-on-year, compared with market expectations of 4%, although it fell modestly above the RBA’s forecast of 3.8%.

With that, economists believe the RBA is unlikely to feel the need to raise its cash rate when it meets next week on August 5-6.

The consumer price inflation report for the June quarter was "good enough to rule out a likely rate hike from the Reserve Bank next Tuesday," said David Bassanese, chief economist at Betashares.

“I think [a rate hike is] very unlikely – today's numbers are not bad enough to require the RBA to revise its inflation forecasts at next week's August monetary policy statement.”

However, while the economy "dodged the bullet" on a potential rate hike in August, Bassanese warned that "the RBA's gun remains loaded" and "could still be fired this year" if inflation fails to show -further declines from what remain uncomfortably high levels.

"My main case is that inflation will fall further - although this also assumes that the economy and especially consumer spending will remain relatively soft, with the unemployment rate rising to 4.5% by the end of the year," Bassanese said.

"This could still lead to the RBA actually cutting rates later this year or at least in the first half of 2025."

CreditorWatch's chief economist, Anneke Thompson, also noted that the latest data was "unlikely" to convince the RBA Board that another hike in cash rates was warranted.

"Consumer demand has very clearly tightened for some time, and volatile items are the main driver of these higher-than-expected monthly CPI releases," Thompson said, noting that some of the most significant price increases were in housing, food, alcohol and tobacco, and surprisingly, clothing and footwear.

HSBC chief economist Paul Bloxham noted that core inflation appeared to be easing, albeit more slowly than the RBA would have hoped.

"We think that a surprise of 10 b.p.t. an upward move for the core will be something the RBA will be willing to look at given that the core CPI was in line with its expectations and the core still shows that disinflation is continuing,” he said.

"However, while today's number suggests that another rate hike is unlikely, it still suggests that inflation is sticky, elevated and falling very slowly."

“With this in mind, we also expect that a rate cut is still some time away. From the end of 2023 our view is that the RBA is unlikely to cut in 2024 as inflation will fall only slowly and that rate cuts will not be until 2025.”

State Street Global Advisors Asia-Pacific economist Krishna Bhimavarapu said the CPI data came in "just a bit" above their modest expectations, but reiterated the view that interest rates "are sufficiently restrictive in Australia".

Bhimavarapu predicted a rate cut could be closer than expected, suggesting the RBA's next move could "very likely" be a cut in November.

Testing the RBA's inflation tolerance

According to Russell Chesler, head of investments and capital markets at VanEck, Australia is still "not out of the woods" and unless inflation falls, the RBA "could still raise rates this year".

"We are a long way from a rate cut," he said.

"The RBA has previously set a low tolerance for a slower-than-expected return to target, suggesting it is amenable to measures that stimulate more pressure on inflation if necessary."

Chesler indicated that inflation is expected to ease to 3.5 percent by Christmas; however, there is little indication of sustained improvement in the main pressure points keeping inflation high, namely housing, wages and services.

“It's been nine months since the last rate hike, 14 months since the tightening cycle began, and 13 rate hikes that added 425 basis points to the official cash rate. Although inflation is in line with the RBA's forecast, Australia still has the highest rate of inflation in developed markets,” he said.

Bob Cooneen, senior economist and portfolio specialist at MLC Asset Management, pointed out that the RBA had been "holding fire" for quite some time, hoping that inflation would cool.

"[It] is understandably disappointed that inflation remains above the target range of 2 to 3 percent,” he said.

In addition, a significant recent central bank survey suggests that financial conditions for consumers are already "very difficult," Cooneen said.

The economist said that while the RBA's main tool to contain inflation was to raise interest rates to dampen demand, Australia's current problem of sticky inflation reflected a combination of reasons that were largely related to supply constraints.

"The surge in insurance, medical and rent costs reflects various long-term challenges such as limited competitive forces (for insurance and health care) and chronic undersupply (lack of new housing construction to match population growth, driving up rents)," said he.

"However, raising interest rates again fails to address supply constraints and risks being the catalyst to push Australia into recession."

Cunneen noted that raising interest rates would prove to be the "wrong medicine" for Australia's inflationary ailment.