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Australia’s core consumer prices surpassed the midpoint of the Reserve Bank’s 2-3% target for the first time since June 2014, a surprise that sent bond yields higher and lifted expectations of earlier interest-rate hikes.
The annual trimmed mean gauge, a measure closely watched by RBA officials, advanced 2.6% in the final three months of 2021, exceeding economists’ estimates for a 2.3% gain, government data showed Tuesday.
The result cements expectations the RBA will scrap its bond-buying program at next Tuesday’s meeting and potentially opens the door to rate rises this year, something Governor Philip Lowe had previously all-but ruled out. Money markets are pricing in a good chance of a rise in May, while economists are increasingly landing on rate liftoff in August.
In response to the data, Australia’s benchmark three-year bond yields surged as much as nine basis points to 1.44%, the highest level since April 2019, as traders bet rates hikes will come sooner than the RBA has indicated.
“All eyes turn now to the RBA’s February meeting,” said Deutsche Bank AG’s Phil Odonaghoe. “We expect a hard stop on the bond purchase program, a reworking/surrender of the ‘wages first’ narrative, and with that a wholesale change in the RBA’s rates guidance, openly acknowledging the chance of rate hikes this year.”
Odonaghoe and his counterparts at Commonwealth Bank of Australia, Westpac Banking Corp., TD Securities, Royal Bank of Canada, Citigroup Inc. and AMP Capital Markets now see the first hike in August. Prior to today’s report, most economists were predicting rate liftoff in early 2023.
Australia had previously been on the periphery of the global inflation story, allowing its central bank to remain dovish.
In his last speech of 2021, Lowe reiterated that rates wouldn’t rise until actual inflation, not forecast, is sustainably within the 2-3% target. He cited RBA forecasts showing underlying inflation will only reach the mid-point of the band in late 2023, suggesting that was a more likely timing for rate liftoff.
But now the global inflation battleground has made its way Down Under, reflecting persistent supply chain disruptions and energy shortfalls. These have already prompted New Zealand and the U.K. to tighten policy and the Federal Reserve is expected to begin raising rates soon.
“Whichever way you look at the data, it is clear that inflation has entered a new period of being sustainably higher,” said AMP’s Diana Mousina.
Still, inflation in Australia is much lower than the U.S., where headline CPI is running at 7%, implying the Fed will need to be much more aggressive than the RBA in tightening policy to try to douse price growth.
What Bloomberg Economics Says:
“A stronger-than-expected acceleration in inflation leaves the Reserve Bank of Australia facing a question confounding many central banks — what should monetary policy do, if anything, to counter faster price gains driven by supply disruptions.”
–James McIntyre, economist.
For full report, click here
Australian corporates have already begun to face the heat from accelerating inflation. On Tuesday, iron ore giant Fortescue Metals Group reported a 20% annual increase in unit costs in the December quarter, reflecting price increase in diesel and labor rates.
(Updates with comments from economists, changes in rate forecasts)
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