Australia's central bank unlikely to cut rates on strong inflation data

Australia's central bank is unlikely to cut rates in the first half of 2016 as the closely watched December inflation data came in above market expectations.

Australia's consumer price index rose 0.4 percent in the December quarter, beating market expectations of 0.3 percent, figures from the Australian Bureau of Statistics on Wednesday showed.

"Inflation is not dead. It is just resting," Commonwealth Bank economist Michael Workman said.

Underlying inflation, which removes volatile price moments, came in 2.0 percent over the year, just at the low end of the Reserve Bank of Australia's (RBA's) inflation target, after a quarterly rise of 0.55 percent.

Workman said the RBA is likely to keep Australia's cash rate on hold at 2.0 percent at its meeting next Tuesday, but the low inflation outcome, at the bottom end of the bank's target range, gives them room to maintain an easing bias.

"But they are unlikely to act on it unless there are signs of deterioration in the jobs market, and the improvement in the jobs data is remarkable," Workman said.

Australia's unemployment rate is steady at 5.8 percent after 300,000 jobs were created over the past year.

AMP Capital chief economist Shane Oliver told Xinhua the RBA will ultimately cut rates, possibly in March or April as the low Australia dollar still has not provided the boost to inflation that is expected.

Australia's central bank has been talking down the local unit in a bid to aid Australia's economic transition from mining-led growth to services while the central government tailors exports to capitalise on the emergent Asian middle class.

The Australian dollar jumped 0.3 of a U.S. cents to reach 70.36 U.S. cents just after the announcement (11:30 local time), implying the chance of a RBA rate cut has reduced. At 12:16 local time (AEDT), the Aussie dollar was trading at 70.39 U.S. cents; however, it is down almost 40 percent from its 2011 highs.

Oliver said to boost inflation, Australia's growth needs to increase up to 3 percent, currently below trend at 2.5 percent, as the fall in the Australian dollar, down 40 percent since the 2011 highs, has not flowed through.

"The Aussie dollar hasn't done the trick of boosting inflation, so we quite clearly need stronger growth," Oliver said.

"You'd be expecting one percent to be added to inflation, but we haven't seen that happen."

Oliver noted Australia's data is a similar story with other countries that have seen their currencies devalue, as consumers around the world are more cautious in their spending habits. Endit