Inflation surprise all but confirms end to rate hikes

The fastest monetary tightening cycle since the 1980s appears to be over after a surprisingly low inflation readout reinforced the case for an end to interest rate hikes.

The Australian Bureau of Statistics on Wednesday reported the monthly consumer price index for November slowed to 4.3 per cent, the lowest level since January 2022.

This led many economists to tip the Reserve Bank would keep the cash rate on hold in February.

Households have borne the brunt of 13 successive interest rate rises and plummeting discretionary income is manifesting in lower consumer spending figures.

The consensus of economists had been for prices to rise by 4.4 per cent in November after a 4.9 per cent increase the month prior.

The downside surprise was enough for Saxo Asia Pacific market strategist Charu Chanana to sound the death knell for rate hikes.

"The slower-than-expected inflation rate for November was a confirmation that the RBA's rate hike cycle has ended," Ms Chanana said.

Her view was supported by ANZ senior economist Catherine Birch and AMP chief economist Shane Oliver, who predicted the Reserve Bank to begin cutting rates in June.

The rates market has all but written off further hikes, with a near-zero chance priced in for a February rate rise.

The market predicts the cash rate to drop from 4.35 per cent to 3.855 per cent by the end of 2024.

But NAB senior economist Taylor Nugent still expects the RBA to hike rates once more at its next meeting before beginning the easing cycle in the second half of 2024.

"The RBA's own forecasts and the December board minutes show some discomfort about how quickly inflation can moderate and that the mid-point of the 2-3 per cent band is still some way off," Mr Nugent said.

JPMorgan chief economist Ben Jarman also remained circumspect, arguing the RBA would remain wary of declaring victory against inflation early with it unlikely to return to the bank's target band this year.

"It is unlikely the leadership will show much open-mindedness to easing soon and we expect the hiking bias to be maintained early in 1H24," he said.

The bigger focus for the Reserve Bank will be December quarter inflation data due out on January 31, which tracks the prices of a wider list of items, including all-important services inflation.

RBA Governor Michele Bullock has expressed concern about "sticky" homegrown services inflation, but the early signs were that prices were beginning to moderate.

"Various market services showed disinflation, for instance with annual rates of inflation for meals out and household services continuing to ease," CBA economist Stephen Wu said.

Insurance premiums were a notable exception, he said, with yearly inflation now running at 16.2 per cent as a result of elevated building costs, higher reinsurance costs and more frequent adverse weather events.

Australian Associated Press