Annual underlying inflation slowed to 2.7 percent in the second quarter, when analysts had expected it to stay stubbornly high at 3 percent. That took it back into the RBA's 2 to 3 percent target band for the first time since mid-2007.
The RBA has already lifted rates by 150 basis points since October as Australia came through the global financial crisis relatively unscathed. That was thanks to aggressive fiscal and monetary stimulus, a stable banking system, rapid population growth and strong Asian demand for its commodity exports.
The headline consumer price index (CPI) also surprised by rising only 0.6 percent in the second quarter, well short of market forecasts of a 1.0 percent increase.
That improvement came even though tobacco taxes jumped 25 percent in the quarter, accounting for about half the entire rise in the CPI. Helping offset that were falls in the prices of holidays, fruit, vegetables and consumer electronics.
Annual consumer price inflation edged up to 3.1 percent, from 2.9 percent, but again was below expectations.