Australian inflation figures revealed a slight increase in consumer prices for November, mainly driven by a sharp rise in electricity costs. However, a decline in core inflation strengthened the prospect for a potential interest rate cut as early as next month.
The Australian dollar depreciated by 0.34% to settle at $0.6214, while three-year bond futures rebounded, gaining 4 ticks to reach 96.11. Current market swaps indicate a heightened probability of a February interest rate cut, now at 64%, up from 50% previously.
According to the Australian Bureau of Statistics on Wednesday, the monthly consumer price index rose at an annual rate of 2.3% in November, slightly up from 2.1% in October and exceeding the market forecast of 2.2%.
Although electricity prices surged by 22% in November, this spike was primarily attributed to the timing of government rebates. Federal and state electricity subsidies still managed to reduce prices by 21.5% compared to the prior year.
Meanwhile, the trimmed mean, a key measure of core inflation, decreased to an annual rate of 3.2% from 3.5%, moving closer to the Reserve Bank of Australia’s (RBA) target range of 2% to 3%.
Abhijit Surya, the economist for Australia and New Zealand at Capital Economics, pointed out that core inflation indicators clearly demonstrate a genuine easing of underlying price pressures. He suggested that if this trend continues in the upcoming quarterly CPI report, it could boost the RBA’s confidence in meeting its inflation objectives.
The latest data also increases the likelihood of the RBA initiating an easing cycle sooner than the currently predicted May timeframe.
The central bank has maintained interest rates unchanged at 4.35% for over a year, up from a pandemic low of 0.1%, and deemed the rate as sufficiently restrictive to achieve its inflation targets while safeguarding employment progress.
