Australia inflation runs hot in July; markets reprice rate-hike risk

[SYDNEY] Australian consumer prices rose more than expected in July as fuel costs jumped, data showed on Wednesday (Aug 26), while core inflation also exceeded forecasts and added to the risk of another hike in interest rates.

That was enough to send the local dollar up 0.3 per cent to US$0.7183, hitting a 12-week high, while three-year government bond futures reversed an earlier rally to be last down four ticks at 95.41.

Traders are scrambling to reprice the risk of a fourth rate hike from the Reserve Bank of Australia (RBA) this year, with a move in September now priced at 38 per cent, up from just 17 per cent before. They are now fully expecting a rate hike by February next year.

After the hot data, ANZ, one of Australia’s big four banks that had forecast no change to interest rates from here, is now tipping a quarter-point rate hike in November. National Australia Bank said that its RBA call was under review.

“The data suggest there is strong upside risk to the RBA’s near-term inflation forecast... The breadth and nature of the upside inflation surprise in July may also be a concern for the RBA,” said Adam Boyton, head of Australian economics at ANZ.

Data from the Australian Bureau of Statistics showed its monthly consumer price index (CPI) rose 1 per cent in July from June, exceeding forecasts of a 0.8 per cent rise, as fuel prices jumped 7.5 per cent after falling for three months.

The annual pace slowed to 3.5 per cent from 3.8 per cent, countering expectations for a sharp slowdown to 3.3 per cent due to an outsized increase from last year dropping out of the calculation.

The trimmed mean measure of core inflation increased 0.5 per cent in the month, the biggest increase in a year and well above forecasts for 0.3 per cent, leaving the annual pace at 3.6 per cent.

The RBA held interest rates steady at 4.35 per cent this month for a second consecutive meeting after three rate hikes this year aimed at taming inflation. Policymakers have warned that they would hike again if inflation risks build.

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Minutes from the central bank released on Tuesday showed several board members judged that it was quite possible the upside inflation risks would materialise, requiring some further tightening. The bank had forecast trimmed mean inflation to slow to 3.3 per cent by the end of the year.

Analysts noted the surprises came from much higher prices across consumer goods and through market services. Prices for tradeable goods jumped 1.5 per cent in the month, while services inflation picked up by 0.7 per cent.

Wednesday’s report showed new dwelling prices jumped 5.7 per cent in July from a year ago, slowing a touch from a 5.8 per cent rise the previous month. Rent inflation held steady at an elevated rate of 3.6 per cent.

Deutsche Bank was quick to call for a hike in September after the data, citing fresh upside risks to inflation, although economists at UBS still think that the RBA is more likely to hike in November than in September.

“For the RBA to hike in September 2026, it would signal a deeper concern by the RBA they are ‘behind the curve’ and hence potentially open the door to multiple hikes ahead,” said Stephen Wu, an economist at UBS.

Wu added that it was more plausible that the RBA could use the September meeting to set up a hike in November. REUTERS