In January, Australian consumer price inflation remained at a two-year low, defying expectations for an increase. This outcome strengthens the belief that interest rates are unlikely to see further increments.
The focus now shifts to February's release, providing insights into the Reserve Bank of Australia's next steps. This month includes more data on inflation in the services sector, which has been declining at a slower pace than for goods.
Meanwhile, New Zealand kept rates steady at 5.5%, signaling a dovish shift. The Reserve Bank of New Zealand revised its future cash rate projections slightly lower, suggesting a potential end to tightening measures.
According to the Australian Bureau of Statistics, the monthly consumer price index (CPI) for January rose at an annual rate of 3.4%, consistent with December and below market forecasts of 3.6%.
Core inflation, as measured by the trimmed mean, increased by 3.8%, down from 4.0% in December. Inflation, excluding volatile items and holiday travel, slowed to 4.1% from 4.2%.
Jonathan Kearns, Chief Economist at Challenger, noted that while interpreting a single month's figure requires caution, the data appears favorable for the Reserve Bank of Australia. The focus remains on services inflation in the coming months.
The Australian dollar showed minimal reaction to the data, trading 0.1% lower at $0.6538, and three-year bond futures remained stable at 96.24.
For January alone, the CPI declined by 0.3%, driven by decreases in holiday travel, clothing, and petrol. Rents grew by 7.4% from a year earlier, indicating a potential peak in rent inflation, while electricity prices rose modestly by 0.8%.
Marcel Thieliant, Capital Economics' Head of Asia Pacific, believes that the January data suggests a faster decline in price pressures than expected by the RBA, supporting his prediction of a rate cut in August.
The RBA has raised interest rates by 425 basis points since May 2022 to 4.35%, with the possibility of further hikes to meet the inflation target. However, financial markets lean towards the view that the RBA has concluded its tightening cycle, with a 60% chance of a first rate cut in August and an expected total easing of 38 basis points by year-end.
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