Australia's inflation rate fell slightly in February, supporting further rate cuts

Australia's consumer inflation eased in February, driven by falling electricity prices, while continued declines in home construction costs and rents supported the case for further interest rate cuts in the coming months.

Data released by the Australian Bureau of Statistics on Wednesday showed that the consumer price index in February was the same as in January. However, annual growth slowed to 2.4% from 2.5%, while forecasts were for it to remain unchanged.

The trimmed mean index measuring core inflation rose 2.7% year-on-year in February, down from 2.8% in January but remaining at the same level as the past three months.

The Reserve Bank of Australia cut interest rates last month for the first time in more than four years but said it was cautious about the prospect of further easing. The central bank is keeping its finger on the pulse of underlying inflation, which it expects to stabilize at 2.7% later this year, above the midpoint of the RBA's 2-3% target range.

The February report provides an update on the situation for many services during the quarter, with inflationary pressures continuing to ease. Prices of dine-in food and take-out food in restaurants rose by 2.8% and 2.5% respectively, returning to the target range of 2-3%.

Insurance costs are still 7.9% higher than a year ago, but that’s the lowest level in two years and has fallen by half since April last year.

The housing market showed signs of continued weakness as Victorian government subsidies led to a 2.5 per cent drop in electricity prices. Most encouragingly, rent and new dwelling price growth slowed further to 5.5% and 1.6%, respectively.

The Australian dollar fell 0.1% to $0.6299, while three-year Treasury bond futures pared earlier losses to fall 3 points to 96.23. Swaps continue to imply about a 70% chance of a rate cut in May.

Markets are now focusing on first-quarter inflation data, which will be released at the end of April.

The central bank cited unexpected strength in the labor market as one obstacle to further rate cuts as policymakers worry it could exacerbate cost pressures and prevent core inflation from slowing to the middle of its target range.

India's government pledged late on Tuesday to implement new but modest tax cuts in a bid to win back disaffected voters ahead of a general election in May, pushing the budget into the red, although most analysts expect them to have no material impact on inflation.