Australia’s Faster-Than-Expected Inflation Boosts Rate-Hike Bets

ov}3qwwujzno8i}y5h14(g6}_media_dl_1.png Reserve Bank of Australia

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(Bloomberg) — Australia’s monthly inflation came in stronger than expected in January, driven largely by housing costs and suggesting monetary policy settings may need to be tightened further.

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Traders bolstered bets on a second interest-rate hike this year after official data showed the closely-watched trimmed mean gauge of consumer prices rose 3.4% last month from a year earlier. That exceeded economists estimate of 3.3% and meant the reading held above the top of the Reserve Bank’s 2-3% target band for a seventh straight month.

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The RBA became the first major monetary authority in the developed world to raise rates this year and faces the prospect of further hikes ahead. While it has adopted a data-dependent stance, financial traders are betting the central bank will tighten policy again in May to take the cash rate to 4.1%, following first-quarter inflation. They see a 60% chance of a third move in November.

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“A range of factors suggest this new tightening cycle will likely be persistent and drawn-out,” said David Robertson, chief economist at Bendigo Bank, “The full quarterly inflation data on April 29 will be the key data point for the May RBA decision, but we will need to see an improvement in underlying inflation to avoid another hike in May.”

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Wednesday’s price reading follows official data last week showing unemployment held at a low level in January while a separate report showed wage growth remained elevated.

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That, “alongside ongoing inflationary pressures, are likely to keep the RBA on a tightening path,” said Wee Khoon Chong, macro strategist at Bank of New York Mellon. “We see a risk that the RBA turns more hawkish and exceeds market rate expectations.” 

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The Australian dollar edged higher after today’s release and yields on the policy-sensitive three-year government bonds advanced as much as 4 basis points to 4.28%. Stocks pared gains.

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Chong expects the Australian dollar — which has gained almost 6% this year against the greenback — to further outshine peers. The Aussie is already the top performing Group-of-10 currency driven by policy divergence with the US which is expected to cut rates. A lift in commodity prices and continued investor interest in non-US assets have also supported Australia’s currency.

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Most economists, including Commonwealth Bank of Australia, National Australia Bank Ltd. and Bank of America Corp. expect the RBA to lift borrowing costs again in May, while some such as AMP Ltd. and ANZ Bank predict a prolonged pause.

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What Bloomberg Economics Says…

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“Our base case is that the RBA maintains a hawkish bias, but will hold fire until the May meeting, when it will update its forecasts after the 1Q25 inflation data.”

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— James McIntyre, economist. 

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For the full note, click here.

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Today’s figures are part of a new series that will eventually replace quarterly inflation data which remains the RBA’s benchmark release for now. In a speech on Tuesday, Michael Plumb, the bank’s head of economic analysis, said the RBA will continue to focus on the quarterly reports for forecasting and assessing underlying inflationary pressures.