Australia’s Inflation Cools, Raising Chances of Interest Rate Cut
AU: Australia's consumer prices rose at the slowest pace in nearly four years in the December quarter, with a pullback in housing costs helping cool core inflation. The consumer price index (CPI) increased by just 0.2% in Q4, below the expected 0.3%, bringing annual inflation down to 2.4% from 2.8% the previous quarter and a peak of 7.8% in late 2022. A key measure of core inflation, the trimmed mean, rose only 0.5% in the quarter—the smallest increase since mid-2021—while its annual pace eased to 3.2%. Core inflation over two quarters, annualised, also dropped to 2.6%, reinforcing expectations that the Reserve Bank of Australia (RBA) may soon adjust its monetary policy.
The cooling inflation data has led markets to price in an 80% chance that the RBA will cut its 4.35% cash rate by a quarter point at its next meeting on February 18, marking the first easing since the pandemic. A potential rate cut would be significant for the Labor government as it heads into a challenging election year. Following the report, local bonds rallied, and the Australian dollar weakened by 0.3% to USD 0.6228. The RBA had previously indicated that slowing inflation might allow for a policy shift, aligning with major central banks that have already begun cutting rates.
Despite the slowdown in inflation, some factors argue against an immediate rate cut. The labour market remains strong, with unemployment hovering around a historically low 4.0% for much of the past year. However, an influx of skilled migrants has helped meet demand for workers, preventing excessive wage growth. The government's key measure of wage growth has slowed to 3.5%, down from a peak of 4.3%, even as employment has continued to expand. Meanwhile, service sector inflation eased to 4.3% in the fourth quarter, and goods inflation fell to 0.8%, its lowest level since 2016.
Source: Reuters