* Q2 headline CPI 1.6% y/y vs 1.5% consensus
* Narrow beat on headline CPI sent A$ rising
* Underlying inflation undershot RBA 2-3% yet again
* Futures still pricing in a November rate cut to 0.75% (Adds economist comments, updates price levels)
By Swati Pandey
SYDNEY, July 31 (Reuters) - Australian consumer prices rose faster than expected in the second quarter but core inflation stayed below the central bank's target band, keeping alive expectations for a cut in a policy interest rate already at an all time low of 1%.
The headline consumer price index (CPI) accelerated 0.6% in the June quarter after flatlining in the previous three-month period. Economists surveyed by Reuters had forecast a 0.5% rise.
The CPI rose 1.6% year-on-year, faster than expectations for a 1.5% increase, the Australian Bureau of Statistics (ABS) data released on Wednesday showed.
The narrow beat means there is less pressure on the Reserve Bank of Australia (RBA) to cut interest rates at its Aug. 6 meeting, having chopped rates by 50 basis points to an all-time low of 1% since June.
The local dollar AUD=D3 climbed 0.2% to a day's high of $0.6876 as markets pared expectations for an August rate cut. 0#YIB:
Investors are still fully pricing in a 25-basis-point cut to 0.75% in November 0#YIB: and there is a real chance of another cut early next year.
"Unfortunately, the stronger inflation read for the June quarter was largely due to volatile or one-off factors...rather than a broad pick-up in inflationary pressures," said Callam Pickering, APAC economist for global job site Indeed.
Closely watched measures of underlying inflation undershot the central bank's target for a 14th straight quarter, the longest stretch since the series began.
"Low inflation speaks to deep underlying problems in the Australian economy," Pickering added. "We expect more will need to be done and anticipate two further cuts over the next 12 months."
MORE CUTS NEEDED
One of the RBA-favoured measures of inflation - trimmed mean - rose 0.4% in the second quarter from 0.3% in the prior quarter, matching expectations. On an annual basis, it held at 1.6% against the RBA's long-term target band of 2% to 3%.
The two key measures of underlying inflation - trimmed mean and weighted median - averaged around 1.4% for the year.
"This confirms that there is very little upward pressure on costs and therefore prices within the domestic economy," said Sarah Hunter, chief economist for BIS Oxford Economics.
Australia's A$1.9 trillion ($1.3 trillion) economy has dodged a recession since the early 1990s but is now battling slowing activity led by a property market downturn, low wage growth and sluggish consumer spending by indebted households.
Australia's newly re-elected government of Prime Minister Scott Morrison has offered tax rebates to millions of Australians to help ease pressure on household balance sheets.
The effect of the move together with the RBA cuts is yet to be seen though there are tentative signs of a pick-up in home prices in the two biggest markets of Sydney and Melbourne.
In the June quarter, the biggest price increases came from fuel, medical and hospital services and international holiday and accommodation while prices for fruit and vegetables, domestic travel and electricity all fell.
BI Oxford's Hunter sees further policy easings despite the narrow inflation beat on Wednesday.
"A further cut to 0.75% is very likely in the December quarter, and this could be followed by more easing in early 2020 if we don't see signs of the residential downturn stabilising or the income tax cuts feeding through to consumer spending," Hunter said.
($1 = 1.4529 Australian dollars)