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(Bloomberg) — A measure of Australian inflation unexpectedly cooled in February, bolstering the case for the Reserve Bank to reduce interest rates further in the months ahead.

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The Consumer Price Index indicator edged down to 2.4%, below economists’ estimate of 2.5% that was also January’s reading, data released by the Australian Bureau of Statistics showed on Wednesday. The headline figure has now been inside the RBA’s 2-3% band for seven straight months.

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The trimmed mean measure, which smooths out volatile items such as food and energy and is the focus of the RBA’s attention, decelerated to 2.7% in February from 2.8% in the prior month. 

The Australian dollar was little changed while yields on the rate-sensitive three-year government bond edged lower. The benchmark stock index extended gains. 

The slowdown was driven by a cooling of housing inflation, including rents and power prices, and a decline in fuel costs, the ABS said.

The data is a useful input for the RBA as it assesses price pressures in the economy, having lowered interest rates to 4.1% last month. While policy makers have gained confidence that inflation is easing, they remain wary of upside risks. 

One potential worry is increased fiscal spending after the government on Tuesday unveiled tax cuts and other sweeteners in a pre-election budget. Finance Minister Katy Gallagher told Bloomberg Television in an interview on Wednesday that the tax reductions are unlikely to jeopardize inflation’s return to target because they are staggered over 2026 and 2027.

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“We are really pleased the Treasury forecasts have inflation coming back sustainably into the band six months earlier than had been expected” in December, Gallagher said, describing it as “really welcome news”

On the potential response from the RBA, the minister said the government will “leave the bank to make decisions based on the information they have.”

The RBA next meets on March 31-April 1 when it’s likely to leave rates on hold. Money markets are pricing a two-in-three chance of a cut in May. 

“Looking further ahead, we expect the March and first-quarter CPI data due at the end of April to show a more pronounced reduction in consumer price pressures — probably enough to trigger a rate cut in May,” Bloomberg Economics’ James McIntyre said.

Wednesday’s report also showed: 

• Rents rose 5.5% in the 12 months to February, the lowest annual growth since March 2023 and consistent with rising vacancy rates across most capital cities, the ABS said
• Automotive fuel prices fell 5.5% in the 12 months to February, following a 1.9% drop in January
• Annual inflation for food and non-alcoholic beverages was 3.1%, compared to 3.3% in January, reflecting a softening across a number of grocery items

—With assistance from Carmeli Argana and Matthew Burgess.

(Adds further details from report, comment from finance minister.)

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