Inflation data released by the Australian Bureau of Statistics (ABS) on Wednesday showed the consumer price index (CPI) rose by a larger-than-expected 1.2% in the September quarter, prompting economists to revise their predictions for the November RBA decision.
ANZ previously expected rates to remain on hold in November, but now believes the “uncomfortably high” quarterly result will force the RBA to push through a 25 basis point rise to bring inflation back to target.
That would take the cash rate to a 12-year high of 4.35%.
“While 4.35% should mark the peak in the cash rate, there is a risk it could tighten beyond that,” ANZ head of Australian economics Adam Boyton said.
“Any easing remains a very long way off.”
Over the year, inflation has lifted 5.4%, down from the 6% annual figure recorded in the June quarter.
But the monthly CPI indicator, a timelier measure of inflation, crept back up for the second month in a row, showing inflation remains sticky despite the cash rate currently sitting an 11-year high.
Fuel, electricity and rents were the biggest contributors to inflation in the September quarter, and the 7.2% jump in fuel prices was the largest quarterly rise since March 2022.
EY chief economist Cherelle Murphy said the surprise inflation figures meant a Melbourne Cup rate hike “looks all but guaranteed.”
“The stronger-than-expected CPI result for the September quarter, higher oil and petrol prices and a depreciating Australian dollar mean inflation is now out of line with the Reserve Bank’s August forecasts,” she said.
While inflation has trended down since a peak of 7.8% in December last year, the higher than expected result creates a problem for the RBA as it tries to slow the economy without crushing the labour market.
PropTrack senior economist Eleanor Creagh said the upside surprise to both headline and trimmed mean inflation — which removes some temporary or one-off volatility — is likely to put pressure on the RBA to raise interest rates again in November.
“Recent commentary has outlined the board as having a low tolerance for allowing inflation to return to target more slowly than expected,” Ms Creagh said.
In her first formal speech as RBA governor on Tuesday evening, Michele Bullock said the central bank’s focus was to bring inflation back to its 2-3% target band within a reasonable timeframe while growing employment.
“It is possible that this can be done with the cash rate at its current level but there are risks that could see inflation return to target more slowly than currently forecast,” she said.
The RBA’s latest forecast predicts the consumer price index will fall to 4.1% by December this year and 3.6% by June next year, before reaching the target band by late-2025.
While the board will have updated forecasts to review at its November meeting, sticky inflation could trigger another rate rise if the RBA thinks it’s too risky not to act.
“The Board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected,” Ms Bullock said in her speech at Commonwealth Bank’s global markets conference.
The cash rate has been on hold at 4.1% since June, however the RBA has consistently flagged that further rate rises may be required to lower inflation, depending on the latest economic data.
“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” Ms Bullock said.
‘Wealth effect’ could hamper efforts to ease inflation
The stronger-than-expected housing market recovery could encourage homeowners to spend – a phenomenon known as the wealth effect that was flagged in minutes of the RBA’s October board meeting as a factor influencing its decisions.
“While rising housing prices alone would not warrant tighter policy, the associated rise in household wealth could support consumption by more than currently assumed, especially if housing turnover were to pick up more quickly than expected,” the minutes stated.
Research by the RBA has shown that Australian households spend more when housing wealth increases, which could potentially hamper efforts to ease inflation.
Home prices nationally climbed 0.35% last month and are up 4.31% so far this year, according to the PropTrack Home Price Index, entirely regaining the price falls of 2022.
Answering questions after her speech, Ms Bullock said that although higher interest rates and inflation had caused consumption to slow, households had savings buffers in place that might be accessed to support consumption.
“We know from history that rising housing prices tend to result in high consumption,” Ms Bullock said.
Property prices across the capitals are tipped to rise 5% next year after finishing this year 8% higher, according to NAB’s latest forecast, even though the bank expects higher inflation will force the RBA to hike rates in November.
“We continue to see the RBA lifting the cash rate to 4.35% at the November meeting before remaining on hold until the second half of 2024,” NAB chief economist Mr Oster said.
Meanwhile, ANZ head of Australian economics Adam Boyton now expects the RBA to raise rates again in November.
“Beyond the November meeting we expect the RBA to return to an extended pause,” he said.
HSBC chief economist Paul Bloxham said the RBA had expected a 0.9% rise to trimmed mean inflation over the quarter, but the surprise 1.2% result meant a November rate hike would be needed to get inflation back to target by the end of 2025.
“We see the balance of risks as suggesting the RBA will need to lift its cash rate in order to be able to continue to plausibly forecast that inflation returns to target over that horizon,” he said.
CBA previously put the probability of a November rate rise at 40%, but revised that estimate up to 70% after the release of the inflation data.
“We consider the lift in underlying inflation over Q3 23 to be sufficiently strong for the RBA to act on their hiking bias at the upcoming board meeting,” said CBA head of Australian economics Gareth Aird.
“A November rate hike will enable the RBA to retain its central scenario for inflation to return to the target band by late 2025.”
AMP deputy chief economist Diana Mousina said another rate rise could cause economic growth to slow significantly in 2024, but still expected the inflation figures to cause the RBA enough concern to lift the cash rate in November.
Sourced from realestate.com