SYDNEY: Australian consumer prices rose at the slowest pace in almost four years in the December quarter, while a pullback in housing costs helped cool core inflation and open the door to a cut in interest rates as early as next month.

Wednesday’s benign price report saw markets price in an 80% probability the Reserve Bank of Australia would cut the 4.35% cash rate by a quarter point when it next meets on Feb. 18.

That would be the first policy change in more than a year and the first easing since the depths of the pandemic.

A fall in borrowing costs would also be welcomed by the Labor government which faces a tough election this year.

Local bonds rallied in reaction, while the Aussie dollar dipped 0.3% to $0.6228.

The data from the Australian Bureau of Statistics showed the consumer price index (CPI) rose 0.2% in the fourth quarter, under forecasts of a 0.3% increase.

Some of the moderation was due to government rebates on electricity and other subsidies, which will tend to reverse once they expire.

Annual inflation dropped to 2.4%, from 2.8% the previous quarter and a peak of 7.8% in late 2022, leaving it bang in the middle of the RBA’s 2-3% target band.

Crucially, a key measure of core inflation, the trimmed mean, increased by just 0.5% in the fourth quarter, the smallest rise since mid-2021.

Australian shares extend gain as easing inflation opens door to rate cut

The annual pace slowed to 3.2%, helped by an easing in the cost of buying, building and renting homes.

The central bank also likes to look at core inflation over two quarters annualised, and that was down at 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,” said 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.”

Just last month, the RBA board surprised many by saying it was more confident inflation was slowing as hoped and that might allow it to ease policy at some stage.

Major central banks around the world have been cutting rates for some months, leaving the RBA lagging the pack as it waited for domestically-driven inflation to recede.

Wednesday’s data showed prices in the services sector did ease somewhat to 4.3% in the fourth quarter, while inflation for goods dropped to the lowest since 2016 at 0.8%.

Arguing against the need for a near-term cut in rates is the strength of the labour market, with unemployment holding around an historically low 4.0% for much of the past year. Yet the high demand for workers has been met in part by an influx of skilled migrants, preventing an upward spiral in wages.

The government’s main measure of wage growth has slowed to 3.5%, from a peak of 4.3%, even as employment galloped ahead.