-Alan Oster, chief economist at NAB
Australia's inflation climbed at a slower pace than expected in the final quarter of the year, dragging the annual headline rate below 2%. The nation's CPI ticked up 0.2% in the December quarter amid a recent decline in petrol prices, with the softening inflation outlook providing the central bank with room to cut interest rates, which has been at 2.5% since August 2013, as early as next week. Measured year-on-year, consumer prices rose 1.7%, down from 2.3% and falling short of the Reserve Bank of Australia targeted band of 2%-3%. Nevertheless, the trimmed mean CPI, which strips out volatile components, climbed 0.7% in the three months through December, overshooting market's expectations for a 0.5% gain. Last time Australia's headline CPI last slid below the RBA's target band was in the March and June quarters of 2012. Disinflation, along with faltering domestic growth, falling commodity prices and global uncertainty, has considerably piled pressure on the RBA to ease monetary policy in recent months. However, the central bank has left itself with little room for manoeuvre, with interest rates already at a all-time low, and reiterating throughout last year that stability in interest rates is the most appropriate course of action. Some economists suggested that lower inflation and a weak Aussie Dollar have already done the work of monetary easing, making an interest rate cut unnecessary. Others, however, say an interest rate cut would help boost investment and spending, and push the local currency even lower.
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