* Q4 CPI +0.4 pct q/q, 1.7 pct y/y slightly above forecasts
* Underlying inflation slows a tick to 2 pct on average
* A$ rises as market had wagered on softer numbers
By Wayne Cole
SYDNEY, Jan 27 (Reuters) - Australian price pressures remained restrained last quarter as underlying inflation slowed to the very bottom of policy makers' target range, offering the scope but not necessarily the trigger for a cut in interest rates.
Key measures of underlying inflation rose by 0.55 percent on average in the fourth quarter, while the annual pace dipped a tick to 2.0 percent. That was the slowest pace in almost four years and at the floor of the Reserve Bank of Australia's (RBA) long-run band of 2 percent to 3 percent.
"Structurally, it looks like pretty low inflation is going to be in place through this year," said Michael Workman, a senior economist at Commonwealth Bank.
"The market will probably keep a rate cut priced in, but it looks unlikely as long as we get pretty good jobs market outcomes, and that appears to be on the cards."
Employment has been one of the bright spots of an economy struggling with the end of a decade-long boom in mining investment. The RBA has also been reluctant to lower rates yet further and risk inflating a bubble in home prices.
Yet turmoil in global financial markets and worries about a hard landing in China, Australia's single biggest trade partner, have led investors to wager on at least one more rate cut.
Interbank futures 0#YIB: imply very little chance of an easing at the RBA's next policy meeting on Feb. 2, but a 25-basis point move to 1.75 percent is almost fully priced in by August.
The Australian dollar AUD=D4 actually blipped higher on the inflation numbers as many speculators had been betting they would surprise on the downside.
Wednesday's data from the Australian Bureau of Statistics showed its headline consumer price index (CPI) rose 0.4 percent in the fourth quarter, a shade above market forecasts.
The annual pace of CPI inflation edged up to 1.7 percent, from 1.5 percent.
Adding most to the CPI in the quarter were price increases for tobacco and holidays, while petrol, telecoms and fruit all showed sizable drops.
The disinflationary pulse from falling oil is far from over. Just last week national petrol prices dived over 5 percent in the biggest drop since late 2008.
The weakness is not just in energy costs. Intense foreign competition is squeezing margins in the retail sector and offsetting the impact of a lower local dollar, while slack in the labour market has wages growing at the slowest pace in over two decades.