Australia's CPI drops unexpectedly, Aussie shrugs

The Australian dollar has showed some movement today but is almost unchanged on the day. AUD/USD is trading at 0.6304 in the North American session.

Australia's CPI eases to 2.4%

Australia's inflation rate surprised on the downside, as CPI eased in February to 2.4% y/y. This was below the 2.5% gain in January which was also the market estimate. The drop in inflation was noted in across a range of sub-categories, including gasoline, electricity and food.

Core inflation also eased as the Reserve Bank's favored core CPI gauge, the trimmed mean, slowed to 2.7% y/y, down from 2.8% in January.

The drop in inflation will be welcomed by the central bank, which finally started its easing cycle in February with its first rate cut in over four years.

RBA looking ahead to May, after election

What's next for the Reserve Bank? The next rate meeting is April 1 but a national election must be called by May 17. The central bank won't want to lower rates during an election campaign, which could be seen as political interference. There is a higher chance of a rate cut at the May 20 meeting, after the election. That meeting will also come after the first quarter inflation report, which could determine whether the RBA lowers rates or stays on the sidelines.

The RBA has long been concerned about the upside risk of inflation, a key reason why the central bank maintained rates at 4.35% even though the economy was faltering. The tariff policy of the new US administration is a major concern for Australia, as a trade war between the US and China would hurt the Australian economy, as China is Australia's largest trading partner.