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Australia’s Accelerating Inflation Boosts RBA Rate-Hike Bets

(Bloomberg) -- Australian inflation accelerated to the fastest pace in 32 years in the final three months of 2022, exceeding forecasts and prompting money markets to price in an interest-rate hike at next month’s central bank meeting.

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Bond yields and the currency gained as the consumer price index advanced 7.8% from a year earlier, exceeding economists’ 7.6% estimate, official data showed Wednesday. The result indicates inflation remains very strong even after 3 percentage points of rate increases between May and December.

While the headline number came in slightly below the Reserve Bank’s forecast 8%, it shows Australia is lagging behind its developed-world counterparts. In a number of economies the inflation impulse has begun to ease, with encouraging signs from producer prices to shipping costs.

“Inflation has probably peaked but remains far too high,” said Su-Lin Ong, head of fixed-income strategy at Royal Bank of Canada. “The data likely seal the case for a 25-basis-point hike in February and the prudent approach would also be a final 25-bps in March to see terminal at 3.6%.”

Traders similarly responded to the figures by pricing in a hike at the Feb. 7 meeting, with swaps signaling better than 90% odds of a quarter-point move to 3.35%. The currency also touched the highest level since August and government bond yields advanced following the release.

In contrast, Australian stocks erased gains and fell as much as 0.5%, trailing peers in the region.

What Bloomberg Economics Says...

“Inflation continues to reflect upward pressure from high commodity prices on fuel and construction costs, combined with the impacts of extreme weather on food supply. We expect pressure from these sources to reverse course over coming months”

— James McIntyre, economist

To read the full note, click here

Core inflation, a measure preferred by the RBA, accelerated to 6.9% last quarter from a year earlier, exceeding economists’ forecast of 6.5%. That reading of the trimmed-mean measure was the strongest since the series began in 2003.

Australia’s inflation release came a couple of hours after New Zealand reported CPI data that potentially opened the door to less aggressive hikes.

The RBA raised its cash rate to 3.1% in December and says it will do “what is necessary” to bring inflation back to its 2-3% target. It forecast the fourth quarter would be the peak for CPI.

Today’s report also showed:

  • The services component of the CPI recorded its largest annual rise since 2008, the ABS said

  • Tradables prices, which are typically impacted by the currency and global factors, increased 8.7% from a year earlier

  • Non-tradable prices, which are largely affected by domestic variables like utilities and rents, climbed 7.4%

Globally, early evidence of easing price pressures have driven expectations that central banks are near the end of their tightening cycle or at least that super-sized hikes are now a thing of the past. Markets are pricing in one final hike from the Bank of Canada later today and the Federal Reserve is expected to downshift to a quarter-point move at its next meeting.

In Australia, while inflation remains hot, timely data on the economy show rising rates and input costs are putting pressure on businesses and households.

“The outlook for monetary policy is complicated right now,” said Callam Pickering, economist at global job site Indeed Inc. “Monetary policy hits the economy with a considerable lag and we’ve barely begun to see the impact of the rate hikes that began in May last year.”

Australian Treasurer Jim Chalmers agreed that inflation was “unacceptably high,” while adding there were signs price growth has peaked.

“While further monthly data and the figures from the March quarter will tell us more, we do expect inflation to moderate over the course of this year.”

--With assistance from Tomoko Sato and Garfield Reynolds.

(Updates with comments from economists, treasurer.)

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