Inflation has fallen to its lowest level since March, pulled down by a 5% annual cut to electricity prices as billions of dollars in government rebates kicked in.

Consumer prices rose by 3.5% in the year to July, the Australian Bureau of Statistics said on Wednesday, down from the 3.8% pace recorded in the 12 months to June.

However, inflation fell less than was expected, suggesting interest rate cuts are still months away.

Economists had expected July to show a rate of 3.4% or lower, which had markets on Tuesday expecting the Reserve Bank would cut its key rate in December.

The Australian dollar rose to US68c for the first time since January, reflecting greater investor confidence that interest rates will stay at their 12-year high in months to come.

The Reserve Bank governor, Michele Bullock, warned earlier in August inflation remained “too high” and was falling too slowly to justify a rate cut by the end of the year.

Fruit and vegetable prices shot up by 7.5% in the year to July, up from a rise of 3.6% in June. Alcohol costs also continued to nudge upwards, recording a 3.7% annual rise, up from 3.4% the previous month.

Inflation across most measures still eased, with the more reliable trimmed mean indicator falling in July to 3.8% from 4.1% in June.

The downward trajectory was close to RBA forecasts for inflation to slide to 3.0% and the trimmed mean to 3.5% by December.

Energy prices have fallen back to the level they were at one year ago thanks to significant government subsidies on electricity bills paid out in July.