Australian consumer prices increased at their slowest rate in nearly four years during the December quarter, with declining housing costs contributing to a moderation in core inflation, hiking the likelihood of an interest rate cut as early as next month.
Following the mild inflation report on Wednesday, markets now predict an 80% chance that the Reserve Bank of Australia (RBA) will reduce the 4.35% cash rate by 0.25 percentage points at its 18th February meeting.
This would mark the first policy adjustment in over a year and the first rate cut since the height of the pandemic. A reduction in borrowing costs would be a welcome development for the Labour government, which is bracing for a challenging election this year.
The news prompted a rally in local bonds, while the Australian Dollar declined by 0.3%, settling at $0.6228, Reuters reports.
According to the Australian Bureau of Statistics, the consumer price index (CPI) increased by 0.2% in Q4, falling short of the forecast 0.3% rise. Part of this slowdown was attributed to government rebates on electricity and other subsidies, which are expected to fade once they expire.
Annual inflation declined to 2.4%, down from 2.8% in the previous quarter and a high of 7.8% in late 2022, placing it squarely within the central bank’s 2-3% target range.
Furthermore, the trimmed mean, a key measure of core inflation, rose by only 0.5% in the fourth quarter, marking the smallest increase since mid-2021. The annual rate eased to 3.2%, driven by lower costs for buying, building, and renting homes.
The RBA also monitors core inflation on a two-quarter annualised basis, which declined to 2.6%.
“If trimmed mean CPI keeps rising at the same pace as it has over the second half of last year, it will reach the mid-point of the band by mid-year, whereas the RBA's current forecasts assume that benchmark won't be met until end-2026,” stated Abhijit Surya, an economist at Capital Economics.
“The upshot is that we now expect the Bank to begin its easing cycle in February, rather than May.”
Last month, the RBA board unexpectedly expressed increased confidence that inflation was slowing as anticipated, suggesting that this could pave the way for a potential policy easing in the future.
Major central banks worldwide have been lowering interest rates for several months, while the RBA has lagged behind, opting to wait for domestically-driven inflation to subside.
Moreover, Wednesday's data revealed a slight easing in service sector prices, which fell to 4.3% in the fourth quarter. Meanwhile, goods inflation dropped to 0.8%, the lowest level since 2016.