Australia’s hotter Q4 core inflation fuels bets for rate hike next week

[SYDNEY] Australia’s underlying inflation ran at a faster-than-expected pace in the December quarter, adding to a recent slew of hot economic data that has investors baying for an interest rate hike as soon as next week.

The firm data prompted ANZ and Westpac to call for a quarter-point rate hike from the Reserve Bank of Australia when it next decides on policy on Feb 3, joining the Commonwealth Bank of Australia and the National Australia Bank.

Swaps now imply a 73 per cent probability for a hike, compared with 60 per cent before.

The trimmed mean consumer price index (CPI), a policy-relevant measure of core inflation, rose 0.9 per cent in the fourth quarter from the quarter before, Australian Bureau of Statistics data showed on Wednesday, topping economists’ forecasts of a 0.8 per cent increase.

That lifted the annual pace to 3.4 per cent, the highest in five quarters and well above the RBA’s target band of 2 per cent to 3 per cent.

“We think the RBA will conclude that demand is running ahead of supply and that an interest rate adjustment would help ensure inflation returns to the target,” said Adam Boyton, head of Australian Economics at ANZ.

“In the wake of an interest rate increase we would anticipate material softening in leading indicators of activity... we view this as a single ‘insurance’ tightening, not the start of a series of rate hikes.”

For December alone, the headline CPI rose 1 per cent from the previous month, the biggest jump since July as the expiry of government rebates drove electricity prices higher and holiday demand boosted travel and accommodation costs.

The annual pace picked up to 3.8 per cent from 3.4 per cent in November and above forecasts of a 3.6 per cent rise.

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Expectations of a hot result had been building in the market, with three-year government bond yields hitting a two-year top of 4.339 per cent immediately after the data. They were last down 1 basis point at 4.257 per cent.

The Australian dollar, which rallied 1.4 per cent overnight to hit a three-year high as the greenback tumbled, was down 0.2 per cent at US$0.6997.

‘More to do’ on inflation

Treasurer Jim Chalmers on Wednesday acknowledged that price pressures are lingering longer than the government would have liked and he would not preempt the decisions taken by the Reserve Bank.

“Today’s numbers are a really important reminder that there is always more to do when it comes to tackling the big challenges in our economy,” he said at a press conference.

The RBA cut interest rates three times last year to 3.6 per cent, but inflation has since reared its head again. Policymakers have warned the entire easing cycle may be over, and the next move in rates could be up, rather than down.

Deputy Governor Andrew Hauser said the central bank does not act on one inflation report and would not necessarily hike if the quarterly trimmed mean came in at 1 per cent, but rather it would take a view about the whole economy.

The recent flow of data, however, has underscored stronger-than-expected economic momentum, with a surprise fall in the unemployment rate suggesting the labour market may have started to tighten again.

Robust consumer spending, record-high housing prices and a recovery in business investment are adding to the case that the economy could be already bumping up against its speed limit.

“Together with strong labour market data and capacity constraints, the case for tighter monetary policy is clear,” said Cherelle Murphy, EY chief economist.

“A higher cash rate, starting with a 25-basis-point increase to take it to 3.85 per cent next week, will be necessary for the Reserve Bank to get inflation back into its 2 per cent to 3 per cent target band.” REUTERS