(Jan 28): Australia’s hot inflation is setting up the Reserve Bank to become the first major central bank to raise interest rates this year, in what would be an awkward aboutface less than six months after it last reduced borrowing costs.
Traders increased bets on a rate rise next week after the closely-watched trimmed mean gauge, which excludes volatile items, climbed 3.4% in the fourth quarter from a year earlier, government data showed on Wednesday. That was slightly above the 3.3% estimate and overshot the top of the RBA’s 2%-3% target.
On a three-monthly basis, underlying inflation was 0.9%, matching estimates.
In a research note after the release, Westpac Banking Corp. became the last of the four major lenders to call a rate rise at the RBA’s Feb 2-3 meeting.
“December quarter inflation had the casting vote and voted ‘Yes, hike’,” said Westpac chief economist Luci Ellis, previously a senior RBA official. “A cash rate increase next week might not necessarily be followed up with a sequence of moves,” she added, pointing out that policymakers are likely to adopt a wait-and-see approach while signalling a readiness to move further.
Westpac’s call followed a similar change by ANZ Bank which also sees a quarter-point RBA hike on Feb 3 to take the cash rate to 3.85%.
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The elevated quarterly inflation print comes just days after unemployment surprisingly fell back towards 4%, both results that signal price strength remains a feature of the economy. The RBA, which last cut in August, now faces the prospect of switching to a rate hike much earlier than anticipated.
“The persistence in housing and market services inflation as well as the broader macro outlook — a positive output gap, still-tight labour market, elevated capacity utilisation — we continue to see the case for the RBA to tighten policy,” said Jo Masters, chief economist at Barrenjoey Markets.
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Headline consumer price index (CPI) rose 3.8% in December on a year-on-year basis, up from 3.4% a month earlier. The ABS is no longer publishing annual CPI in its quarterly data as it shifts to a monthly inflation framework.
Three-year government bond yields declined three basis points to 4.28% even as meeting-dated overnight indexed swap (OIS) showed that traders boosted bets on a hike on Tuesday to a 76% chance, from 63% before the CPI data.
The inflation reading helped solidify the Australian dollar’s almost 5% rally this year, the second best performer among Group-of-10 currencies. The Aussie touched its highest against the greenback in almost three years on Tuesday on expectations of rate hikes this year and President Donald Trump suggesting he wants a weaker currency.
“If inflation remains uncomfortably high in coming quarters, the board will act again,” Westpac’s Ellis said. “However, further moderation over coming quarterly inflation prints, together with benign reads on the labor market, might see the board wait for some time before moving the cash rate again.”
Unwelcome but unsurprising new figures from the Australian Bureau of Statistics (ABS) show inflation is much lower than when we came to office but still higher than we’d like.
Temporary factors like the end of energy rebates drove some of the increase, with inflation still expected to decline over time.
The central bank had appeared to be on track to hit its inflation target last year and undertook a brief easing cycle between February and August when it cut the key rate by a total of 75 basis points to 3.6%.
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However, at the December policy meeting as price pressures mounted, governor Michele Bullock said further easing is unlikely in the near term, and the next move could well be a hike.
The RBA operates under a dual mandate that as well as aiming for inflation of 2.5%, tries to keep the economy at maximum sustainable employment.
“Australia’s fourth-quarter inflation reading is hotter than expected, but not hot enough to push the RBA to reverse course on its easing cycle and hike the cash rate at the February meeting. The details of the release indicate that the inflation pickup remains transitory — which argues for a pause, rather than an end to easing.”
The largest contributor to annual inflation in December was housing, up 5.5%, followed by food and non-alcoholic beverages, up 3.4%, and recreation and culture, which rose 4.4%. Annual goods inflation was 3.4% in the 12 months to December led by electricity, which rose 21.5%.
Annual services inflation was 4.1% in the 12 months to December, up from 3.6% to November. Inflation in discretionary spending was 3.5%, while non-discretionary climbed 3.9%.
Uploaded by Evelyn Chan
