By Stella Qiu

SYDNEY (Reuters) -Australia’s consumer inflation slowed in February, helped by a fall in electricity prices, while the continued easing in home building costs and rents supported the case for more rate cuts in the months ahead.

Data from the Australian Bureau of Statistics on Wednesday showed the monthly consumer price index was flat in February from January. The annual pace, however, slowed to 2.4% from 2.5%, versus forecasts for no change.

The trimmed mean measure – a gauge of core inflation – rose an annual 2.7% in February, slowing from 2.8% in January, but still staying around the level where it has been for the past three months.

“Today’s inflation data shows more positive news on the inflation story in Australia,” said My Bui, an economist at AMP.

The trimmed mean measure is on track to rise 2.9% year-on-year in the first quarter, she said, meaning the core annual gauge will be back in the central bank’s target band for the first time in three years.

The Reserve Bank of Australia cut interest rates for the first time in over four years last month but said it was cautious about the prospects of further policy easing. It is closely watching the pulse of underlying inflation, which is only expected to settle at 2.7% later this year, above the midpoint of the RBA’s 2-3% target band.

The February report provided updates on many services for the quarter where inflationary pressures continued to ease. Prices for restaurant meals and takeaway food grew 2.8% and 2.5% respectively, back in the target band of 2-3%.

Insurance costs were still running at an elevated 7.9% from a year ago, but that was the lowest in two years and has halved since April last year.

There were signs of continued softening in housing, driven by a 2.5% fall in electricity prices due to the payment of government subsidies in Victoria. Most encouragingly, price gains for rents and new dwellings eased further to 5.5% and 1.6% respectively.

The Australian dollar slipped 0.1% to $0.6299, while three-year bond futures trimmed earlier losses to be down 3 ticks to 96.23. Swaps continued to imply there is about 70% chance of a rate cut in May.

Markets are now squarely focussed on the first quarter inflation data due at the end of April.

“We are confident that the RBA will keep rates on hold on 1 April,” said Luci Ellis, chief economist at Westpac, tipping the next cut would be in May.

“Looking forward to May, the inflation data will once again be crucial… even a small downside surprise for the RBA on trimmed mean inflation in the March quarter will cement our current view on the timing and scale of further cuts.”

The central bank has singled out the surprising strength in the labour market as one hurdle to more rate cuts, as policymakers worry it could stoke cost pressures and prevent core inflation from slowing to the middle of the target band.

The government late on Tuesday promised new but modest tax cuts in a push to win back disgruntled voters ahead of a May election, tipping the budget into the red, although most analysts do not expect a material impact on inflation.

(Reporting by Stella Qiu; Editing by Christopher Cushing and Shri Navaratnam)

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