Australia's Core Inflation Slows, Keeping Door Open to Feb Rate Cut

The Reserve Bank of Australia (RBA) has been closely monitoring inflation data, with a particular focus on the trimmed mean CPI, which is the central bank's preferred measure of underlying inflation. In recent months, the trimmed mean CPI has shown a decline, with the most recent data indicating a rate of 3.5% per annum in the September quarter and an expected rate of around 3.4% per annum in the December quarter. While this is a significant improvement from the peak of 8.4% per annum in December 2022, it remains substantially above the RBA's target range of 2-3%.



The RBA has acknowledged the progress made on inflation but maintains that there is still substantial work to be done. In a recent statement, the RBA noted that a pick-up in inflation or a slower-than-expected return to target remains the greatest near-term risk for the Australian economy. This has led market participants to price in at least three 0.25% interest rate cuts by around the middle of 2025, as indicated by the ASX 30-Day Interbank Cash Rate Futures Implied Yield Curve.



However, the market pricing has shifted modestly towards a higher Reserve Bank official cash rate (OCR) in the longer run, suggesting that the medium-to-long run OCR may settle at a higher level than previously thought. This shift reflects the ongoing strength in the jobs market, as cited by RBA governor Michele Bullock, which may delay the start of the monetary easing cycle.

As the RBA continues to monitor key economic indicators, such as inflation data, GDP growth, and the unemployment rate, market expectations for a February rate cut remain uncertain. The next CPI data release is scheduled for January 29, 2025, and the next GDP growth figures are due on March 5, 2025. These data points, along with any surprises in the unemployment rate, could influence the RBA's decision-making process regarding a potential February rate cut.

In conclusion, the recent slowdown in Australia's core inflation has kept the door open to a potential February rate cut by the RBA. However, the ongoing strength in the jobs market and the shift in market pricing towards a higher OCR in the longer run suggest that the RBA may proceed cautiously in its monetary policy decisions. As the RBA continues to monitor key economic indicators, market expectations for a February rate cut remain uncertain, and investors should stay tuned for further developments.