Headline inflation fell to only 1.7% in the fourth quarter last year, down from its previous level at 2.3% in the September quarter. The vast bulk of the decline came from falling fuel prices, which slumped 6.8%.

“However the core inflation number is much more significant. That pretty much wipes out any chance of a rate cut,” said Professor Richard Holden from the UNSW Business School ahead of the RBA’s meeting.

“Normally, with inflation below 2% for the time in 18 months, this would give scope to the Reserve Bank of Australia to cut interest rates at its next meeting on Tuesday the 3rd of February.”

Core inflation strengthened unexpectedly in the last quarter, up 0.7% to 2.3% over the past year, driven partly by a 5.8% rise in the cost of domestic holiday travel and accommodation, a 4.8% rise in tobacco prices a 0.6% rise in non-tradable goods and services.

“This suggests the domestic economy may have ended the year quite strongly, and weakens the argument for additional monetary policy stimulus,” he said.

The Australian dollar rose sharply from just above 79 US cents after the announcement.

“Indeed the foreign exchange market’s reaction—the Aussie dollar jumped nearly 1 cen​​t—suggests that the RBA will probably not cut rates at the next meeting,” added Professor Holden.

Professor Richard Holden from the UNSW Business School can comment on the economy, interest rates, and the dollar. For comment call Richard Holden on 02 9385 4700 | 0409 446 296 | richard.holden@unsw.edu.au
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