Australian Inflation Surprisingly Strong, Adds to Rate Hike Risk
Australian Inflation Exceeds Expectations
Australian inflation in the third quarter came in stronger than expected, indicating persistent cost pressures that significantly increase the likelihood of an interest rate hike as early as next month. The surprising strength in inflation has prompted investors to narrow the odds on the Reserve Bank of Australia (RBA) resuming rate hikes after four months of pauses.
Risk of Rate Hike
Investors are now pricing in a 60% chance of a quarter-point hike to 4.35%, compared to 35% before the release of the data. The consumer price index (CPI) rose 1.2% in the third quarter, surpassing market forecasts of 1.1% and marking an increase from the previous quarter’s 0.8%. Although the annual pace of inflation slowed to 5.4% from 6.0%, it still exceeded expectations of 5.3%. Furthermore, the CPI for September alone rose to 5.6% compared to the same month the previous year, up from 5.2% in August.
Core Inflation and Market Reaction
The trimmed mean, a closely watched measure of core inflation, rose 1.2% in the third quarter, exceeding forecasts of 1.1%. The annual pace of core inflation slowed to 5.2% from 5.9%. In response to the data, the Australian dollar rose 0.5% to a week high of $0.6390, while three-year bond futures tumbled 15 ticks to 95.68, the lowest since 2011. Market expectations now indicate that rates could peak at 4.43% early next year.
Reserve Bank of Australia’s Stance
Commentary from the Reserve Bank of Australia has recently become more hawkish. Michele Bullock, the new RBA governor, warned that there are risks inflation could prove to be more stubborn than expected, necessitating further interest rate increases. Policymakers have expressed a low tolerance for allowing inflation to return to target at a slower pace than currently projected.
Economic Forecasts and Outlook
The central bank had forecasted in August that inflation would only return to the top of the bank’s target range of 2-3% in late 2025. The updated economic forecasts from the Reserve Bank of Australia are set to be released in early November.
In conclusion, Australian inflation for the third quarter has exceeded expectations, indicating persistent cost pressures that increase the likelihood of an interest rate hike. The Reserve Bank of Australia’s warnings and market reactions suggest that inflation may be more stubborn than initially anticipated, leading to the possibility of further rate increases in the near future.
