Australia's headline Consumer Price Index (CPI) fell for the first time in over eight years yesterday, driven down by falling fuel and banana prices.
The unexpected drop in inflation has meant that few analysts now expect a rate hike from the Reserve Bank of Australia in February.
"Today's much anticipated deceleration in the core measure of inflation closes the case for a further RBA tightening on February 7," said Jarrod Kerr, an economist at JPMorgan in Sydney.
Australia's CPI posted a 0.1 per cent decline in the fourth quarter and the RBA's 'core' measure of inflation, the trimmed mean, came in at the bottom of market expectations. It experienced a 0.5 per cent quarter on quarter rise, well below market expectations of about 0.7 per cent, which kept the annual rate unchanged at 2.9 per cent.
It was just above 3 per cent in the September quarter.
Shane Oliver, head of investments and chief economist at AMP capital in Sydney, expects inflation will fall back yet further with subsequent rate cuts to come.
"With petrol prices and banana prices falling further in the current quarter it's quite likely that inflation will be around 2 per cent when the March quarter figures are released in 3 months time," he said.
"The bottom line is that the inflation threat is receding. The Reserve Bank will now likely leave interest rates on hold for the next six months or so. We continue to expect rate cuts later this year."
