Money market traders are betting the Reserve Bank will cut official interest rates next week after the release of sharply lower-than-expected inflation data on Wednesday.

Australian retail prices rose by only 0.5 per cent in the September quarter, which means annual inflation rose by only 1.5 per cent in the 12-month period.

The data release triggered intense speculation that the RBA would have to ease monetary policy at its next meeting and caused traders to factor in a 67 per cent chance that official rates will be lowered to 1.75 per cent next week.

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Before the inflation numbers were released the futures market was forecasting only a 31 per cent chance of a November cut.

HSBC chief economist Paul Bloxham believes the latest inflation data has almost locked in a 0.25 per cent cut at the RBA’s next board meeting on Tuesday.

“Today’s much lower-than-expected underlying inflation numbers are likely to force the RBA’s hand,” he said on Wednesday.

While most economists are saying there is likely to be another cut before the end of the year, not all agree it is certain.

Traders expect the Reserve Bank to cut interest rates. Photo: Getty

Stephen Koukoulas of Market Economics said the inflation data had increased the likelihood of another easing of monetary policy.

“It will be a heated discussion at the November board meeting, there’s no doubt about that,” he said.

“However, there is no guarantee of a cut – my call is that they will stay on hold at least until December.”

If there is an official cut on Tuesday some economists are questioning whether it will achieve much in the way of lowering lending costs of borrowers.

Recent hikes to mortgage rates by the four major banks suggest that most borrowers might only receive a fraction of an official reduction of 0.25 per cent.

Mr Bloxham said that the mortgage hikes by the big banks had contributed to tighter financial conditions.

“The RBA now has multiple reasons to consider a cut,” he said.

Local money markets were on Wednesday night waiting on the outcome of the US Federal Reserve’s monthly meeting on monetary policy.

The Fed had been expected to increase interest rates this year, but has remained on hold thus far.