Australia Inflation Surprisingly Tame in Q4

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Australian consumer price inflation was unexpectedly benign last quarter thanks to falls in food, electronics and drugs, suggesting there was still plenty of scope for further rate cuts even if there was no urgency for a move as early as next month.

The local dollar dipped after the Australian Bureau of Statistics reported on Wednesday the consumer price index (CPI) rose 0.2 percent in the fourth quarter, a big improvement from an outsized 1.4 percent increase the previous quarter.

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Annual inflation ran at 2.2 percent, again under forecasts and in the lower half of the Reserve Bank of Australia's (RBA) long-term target of 2 to 3 percent.

"Certainly it makes it easier for the RBA to cut rates and it suggests they will be revising down some of their inflation forecasts," said Brian Redican, a senior economist at Macquarie.

"There's probably a 35 to 40 percent chance of a February rate cut, so not enough to get it over the line, but certainly we think the prospects of a March move are very real."

The central bank cut rates by 125 basis points last year as a slowdown in world growth and falling export prices darkened the economic outlook.

Yet the world background has brightened in recent weeks, with the Chinese economy seemingly turning a corner and even Japan taking bolder steps to beat deflation.

A recovery in prices for some of Australia's key commodities, notably iron ore, has also lessened the urgency for another easing in domestic policy.

As a result markets are pricing in only around a one-in-three chance of an easing at the RBA's next policy meeting on February 5, but still see rates bottoming around 2.5 percent sometime this year.

When setting policy, the RBA focuses on a range of measures that strip out the biggest price moves in any quarter, seeking to find the underlying pulse of inflation.

These measures were also nonthreatening, rising 0.55 percent on average in the fourth quarter. Annual underlying inflation of 2.3 percent was also under forecasts and the previous quarter was revised lower.