Australian inflation data: RBA rate cut expectations rise higher

The Australian inflation data was encouraging:

• Australian Q4 2024 inflation headline 2.4% y/y (expected 2.5%)
• AUD/USD has dropped after the better than expected Q4 inflation data from Australi

Where we are at:

• Inflation slows significantly: Consumer prices rose at their slowest pace in almost four years in Q4 2024.
• Market expectations for rate cuts: Markets now price in an around 80% chance that the Reserve Bank of Australia (RBA) will cut the 4.35% cash rate by 25 basis points at its February 18 meeting.
• Government subsidies impact: Some of the inflation moderation was driven by government rebates on electricity and other subsidies, which may reverse once they expire.
• Annual inflation falls into target range: Inflation dropped to 2.4%, down from 2.8% in Q3 and a peak of 7.8% in late 2022, landing within the RBA’s 2-3% target range.
• Core inflation easing:
  • Trimmed mean inflation rose just 0.5% in Q4, the slowest since mid-2021.
  • Annual trimmed mean fell to 3.2%, driven by a slowdown in housing-related costs.
  • The RBA’s preferred six-month annualized core measure declined to 2.6%.
• Labor market strength as a counterbalance:
  • Unemployment remains low at 4.0%, arguing against an urgent rate cut.
  • Strong labor demand has been offset by skilled migration, preventing rapid wage growth.
  • Wage growth has slowed to 3.5%, down from a 4.3% peak, even as employment remains strong.

While inflation has cooled, reinforcing market expectations for a rate cut, the strong labor market and stable wage growth may lead the RBA to hold off on immediate easing until more data confirms a sustained downward trend in inflation. Mix in high
government spending and a falling dollar as reasons the RBA may extend its hold.

Reserve Bank of Australia Governor Bullock is under pressure to cut ahead of a May Australian election.

This article was written by Eamonn Sheridan at www.forexlive.com.