Inflation in Australia edged higher in the fourth quarter of 2015 as tobacco and travel costs rose sharply. CPI rose by 1.7% year-on-year in the final quarter of last year, beating expectations of a 1.6% annual rise and compares with a rate of 1.5% in the previous quarter. However, the figure was still below the Reserve Bank of Australia’s target of 2-3%.
The RBA’s preferred measures, the weighted mean and the trimmed mean were more muted though, indicating that there might still be some room for future rate cuts despite the pick-up in the headline rate.
The weighted median CPI rate dropped to 1.9% in the fourth quarter from 2.2% in the previous quarter and was below forecasts of 2.1%. The trimmed mean CPI rate was unchanged at 2.1%, in line with estimates.
The RBA is due to meet next Tuesday for its next policy meeting but is not expected to announce any changes to its cash rate. The central bank last cut rates in May 2015 and has held it steady since. The depreciating Australian dollar has provided some relief to the economy from the falling commodity prices and slowing demand from the country’s largest export partner, China.
Inflation is likely to head lower in the coming quarters as energy prices continue to weaken. Fuel prices fell by 5.7% over the quarter in Q4 and further falls are expected following the sharp decline in the price of oil since the start of the year. This should make it easier for the RBA to cut rates below 2%. The tone of the RBA Governor’s statement next Tuesday will be eyed by analysts for any signs of the timing of the next rate cut. Markets have priced in a quarter point cut in August.
In December, the Bank struck a neutral tone and is expected to maintain that stance at its February meeting. The RBA is cautious about the upside risks to prices from falling unemployment and heated property prices in urban areas.
The Australian dollar got a boost from the higher headline inflation reading as traders were anticipating a downside surprise than an upside one. The aussie jumped by 0.7% to 0.7040 against the US dollar immediately after the data from around 0.6992 and extended its gains to 0.7051 in mid-European session. It also firmed against the New Zealand dollar and was last trading at 1.0827.
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