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Australia's Jan inflation holds at two-year low, eyes on Feb release

A customer looks at products marked with discounted prices on display at a chemist in a shopping mall in central Sydney

By Stella Qiu

SYDNEY (Reuters) -Australian consumer price inflation held at a two-year low in January despite forecasts for an uptick, reinforcing expectations that interest rates are unlikely to increase further.

Attention is set to quickly turn to February's release for clues on the direction of next steps by the Reserve Bank of Australia as the second month in a quarter will contain more data on inflation in the services sector, which has been declining at a slower pace than for goods.

Across the Tasman, New Zealand held rates steady at 5.5%. In a dovish shift, the Reserve Bank of New Zealand lowered its projections for the future cash rate to peak at 5.6% from 5.7%, adding to signs that it too is likely done tightening.

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Australia's monthly consumer price index (CPI) rose at an annual pace of 3.4% in January, unchanged from December and under market forecasts of 3.6%,data from the Australian Bureau of Statistics showed on Wednesday.

A closely watched measure of core inflation, the trimmed mean, rose an annual 3.8%, down from 4.0% in December. Inflation excluding volatile items and holiday travel slowed to 4.1% from 4.2%.

"I think we want to be careful about reading too much into one month's figure, but there is nothing in here that won't be good news for the RBA," said Jonathan Kearns, chief economist at Challenger.

"The question really is going to be what's happening with services inflation," he added.

February's figures will capture more price changes for a range of services from hair cuts to dining out.

The Australian dollar reacted little to the data and was last 0.1% lower at $0.6538. Three-year bond futures held at 96.24.

For January alone, CPI fell 0.3% from the previous month, driven by declines in holiday travel, clothes and garments and petrol. Holiday travel slumped 5.2% from a month earlier.

Rents grew 7.4% in January from a year earlier, unchanged from December, a sign that rent inflation likely has peaked, while electricity prices rose a modest 0.8%, helped by the government's relief policy.

"The January data suggest that price pressures are likely to abate more rapidly than the RBA is expecting," said Marcel Thieliant, Capital Economics' Head of Asia Pacific, adding that he is confident with his call for a first rate cut in August.

"Barring any unforeseen shocks, it seems increasingly likely that the CPI data will undershoot both of the bank's projections."

The Reserve Bank of Australia has raised interest rates by 425 basis points since May 2022 to a 12-year top of 4.35%, and has not ruled out the risk of another hike if necessary to bring inflation back to the bank's target band of 2-3%.

Financial markets are confident the RBA is done tightening. Swaps imply about a 60% chance of a first rate cut in August and a total easing of 38 basis points by the end of the year, little changed from before.

(Reporting by Stella Qiu and Wayne Cole; Editing by Tom Hogue, Sam Holmes and Edwina Gibbs)