The market now sees just a 14 per cent chance of a rate cut on Tuesday, down from 50 per cent just before the data was released.

Australian consumer prices rose 0.2 per cent in the fourth quarter and 1.7 per cent over the year, which came in below expectations of a 0.3 per cent and 1.8 per cent rise. But underlying inflation as measured by the trimmed mean CPI rose 0.7 per cent over the quarter, well above the expected 0.5 per cent rise, and 2.2 per cent over the year.

The Aussie had dropped as low as US79.01¢ in the morning session, despite falls in the greenback against other major currencies after surprisingly weak US durable goods data. However, the higher than expected core inflation sparked a rally in the local currency to as high as US80.10¢, before slipping back a bit to US79.92¢ in late trade.

"At first glance today's results shouldn't materially change our soft inflation outlook, and we still believe disinflationary pressures leave the door open for cuts," said ANZ Bank's co-head of Australian economics, Riki Polygenis. "It will however disappoint market expectations for a February cut, which we saw as a less likely outcome given the strong desire of Reserve Bank governor Glenn Stevens to provide 'steady and predictable' policy."

Mr Polygenis said a rate cut in March would "give the RBA greater opportunity to sell any upcoming shift as an 'insurance' cut rather than reflecting a significant deterioration in the economic outlook".

Other economists also predicted a rate cut later in the year, or not at all.

"The data probably gave the Reserve Bank of Australia the scope to hold [interest rates] next week. I think the bank will not want to spook the market so early in the year," said Quay Equities' head of trading Tristan K'Nell.

Core inflation rose mainly due to the rise in the cost of new dwelling construction.

Some economists maintained earlier predictions that there would be a rate cut in the RBA's February meeting.

"Australia is very much part of the disinflationary/deflationary world as the just released CPI has shown. Moreover, very low inflation in aggregate is likely to persist even in the face of a depreciating Australian dollar which might normally be expected to raise prices over time,"  said Altair Asset Management's chief economist, Stephen Roberts.

Mr Roberts predicts the RBA will cut the cash rate from 2.5 per cent to 2.25 per cent at next Tuesday's meeting.

RBC said the inflation data was soft enough to justify two rate cuts this year.

"Despite the lack of a smoking gun in today's inflation report, the indicators of inflation coupled with recent global central bank action and weaker commodity prices are enough for us to now put two cuts into our RBA profile in 2015," Royal Bank of Canada's senior economist, Su-Lin Ong, said in a note.

While local economists are still divided over the future course of the RBA, the global trend to monetary easing is growing.

Singapore's central bank on Wednesday unexpectedly eased monetary policy joining global policymakers in acting to support their economies as inflation slows.

The currency headed for the biggest slide in almost three years, while the Aussie dollar shot up 1.6 per cent to $S1.08.

Last week, Canada's central bank reduced the overnight rate to 0.75 per cent, from 1 per cent. It was the first rate change since September 2010.

The outcome of the US Federal Reserve's meeting will be known on Thursday morning AEST.