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Analysts at the Australia and New Zealand Banking Group (ANZ) reiterated their call of giving a 50% probability to the RBA’s rate action in next week’s policy meeting even after the upbeat release of Australia’s fourth quarter (Q4) CPI data.

Key quotes

Headline inflation came in stronger in Q4, up 0.7% q/q compared to 0.5% in the previous quarter. This saw the annual rate rise to 1.8% from 1.7%.  

Trimmed mean inflation, the RBA’s preferred measure of inflation, stayed at 0.4% q/q, which saw the annual number unchanged at 1.6%.

The ANZ Diffusion Index measures the proportion of the basket with annualized price rises of 2.5% or more. It fell to 35% after rising to 54% in Q3, indicating how widespread the weakness in inflation is in the CPI basket.

Although headline inflation was a touch higher than the market expected, trimmed mean inflation was in line with market and RBA expectations.

These numbers, in addition to other recent economic data, give the RBA some flexibility around the timing of the next rate cut. Taken all together, this cements our view that an RBA move next week is materially less than a 50% probability.

However, we think the RBA will eventually need to ease, if it is to drive the unemployment rate down further and get inflation back to target.