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Financial markets responded swiftly to new inflation data, with movements in currency, bonds, and equities reflecting heightened speculation over a potential interest rate cut by the Reserve Bank of Australia.
The trimmed mean inflation rate dropped to 3.2% from October’s 3.5%, according to the Australian Bureau of Statistics (ABS). Shortly after, the Australian dollar fell from $62.40 US cents to $62.23 US cents. Yields on three-year government bonds also declined, while the benchmark equities index reversed earlier losses to post gains.
Current market sentiment indicates a 70% probability of a 25-basis-point rate cut in February, with a full reduction anticipated by April.
The RBA has held the cash rate steady at 4.35% since November 2023, its highest level in 13 years. While minutes from the RBA’s December meeting suggested optimism about inflation trends moving toward the target range, they also highlighted ongoing demand pressures and global uncertainties.
Treasurer Jim Chalmers wrote on X: "New monthly numbers show underlying inflation has come down. Headline inflation has been in the lower half of the RBA’s target band for three months now, for the first time since 2021. These are important & encouraging reminders of the progress made in the fight against inflation."
The possibility of monetary easing may offer some relief for the Labor government, which is under increasing pressure ahead of a federal election due by May 17. High interest rates and cost-of-living challenges have placed economic management at the centre of voter concerns.
