Australia's hot inflation builds case for election rate increase

Core inflation accelerates to fastest pace since 2009

Australia's hot inflation builds case for election rate increase

by Swati Pandey

Australia’s core inflation accelerated to the fastest pace since 2009, prompting traders to price in an interest-rate increase at Tuesday’s central bank meeting that’s being held just weeks out from an election.

The annual trimmed mean gauge that smooths volatile items breached the upper end of the Reserve Bank’s target to hit 3.7%, government data showed Wednesday. The result has swaps traders now fully pricing in a 15-basis-point hike at the RBA’s May 3 meeting with a 25% chance of a 40-basis-point move.

The result intensifies pressure on the RBA to abandon its traditional political caution and initiate rate lift-off ahead of the May 21 election. The central bank, which targets consumer prices of 2-3%, signalled earlier this month that a hike would likely come soon, while suggesting it wanted to see today’s report and wages data on May 18.

Cherelle Murphy, chief economist at Ernst & Young LLP, said the central bank couldn’t afford to wait for the wages outcome

“A record low cash rate of 0.1% is clearly now no longer appropriate for this economy, meaning the Reserve Bank must join other central banks around the world and tighten monetary policy,” she said. “To not do so risks the RBA losing credibility.”

A rate hike during an election campaign would pile further pressure on a centre-right government that’s already trailing the Labor Party in opinion polls. Surging living costs and concerns that mortgage repayments will soon jump are hitting consumer sentiment, with separate data Tuesday showing pessimists outnumber optimists.

Ahead of the release, the consensus among economists had been that the board would stand pat next week. Others, including Goldman Sachs Group Inc., saw the RBA delivering an outsized 40-basis-point move in June. Today’s strong numbers have already prompted forecast amendments.

“We have moved our call,” said Diana Mousina, senior economist at AMP Capital Markets Ltd, which now expects a 40 basis point hike in May. “I don’t think the RBA were expecting themselves to be raising interest rates in May but given this data they have to act.”

Inflationary pressures worldwide have been escalating, intensified by Russia’s war on Ukraine and the accompanying fallout on commodity and energy prices.

RBA Governor Philip Lowe had been among the more dovish policy makers, arguing elevated inflation was transitory and maintaining that rates would remain on hold until local wage growth accelerated. However, the risk of expectations of higher inflation becoming entrenched among households prompted a hawkish pivot this month from the governor.

Global supply chain disruptions driven by China’s stringent lockdowns to curb COVID-19 also suggest little prospect of an early abatement in inflation. China is Australia’s largest trading partner and risks to its outlook may be a reason for Lowe to opt for caution.

Still, price pressures have prompted a host of central banks including those in New Zealand and Canada to deliver jumbo rate hikes, with the Federal Reserve potentially set to follow suit.

--With assistance from Tomoko Sato.


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