It’s going to be a big interest rate hike

Huge CPI increase puts pressure on RBA for "aggressive" rise

It’s going to be a big interest rate hike

The latest official Consumer Price Index figures are in, and it is not pretty reading - which is why financial markets are pricing in a big move by the Reserve Bank next month.

ABS September figures, released on Wednesday, show a 1.8 % rise for the previous quarter. Annual inflation is now 7.3%: a red hot total that is bound to get the RBA’s attention. The RBA has forecast inflation to reach 7.75% over 2022, and Wednesday’s figure is not far off that, with three months to go.

The annual CPI jump is the biggest for three decades: the last time it was this high was in 1990, when it hit 7.7%.

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According to the ABS, the big drivers of the increase were new dwellings (3.7%), household fuels (nearly 11%) and furnishings (6.6%), to fill all those newly bought homes.

Based off the figures, Australian bond yields immediately rose, three-year bonds jumping eight basis points, 10-year bonds rising by three, making the effective rates 3.58% and 3.99% respectively. Those jumps indicate the market is expecting a 0.5% rate from RBA Governor Philip Lowe next Tuesday.

If rates do jump as much, it will follow the 0.25% official cash rate hike in October, which surprised many economists with its timidity. This catch up is possibly the price that borrowers pay for ducking an earlier hike.

“The stronger-than-expected rise in consumer prices in Q3 is consistent with our forecast that the Reserve Bank of Australia will hike rates more aggressively than most anticipate,” Capital Economics senior Australian analyst Marcel Thiellant told the Australian Financial Review earlier on Wednesday.

“The arguments for a 25-basis point increase rested on the risks to global and domestic growth, and the potential for inflation to subside quickly,” the RBA said in its minutes.

Looks like that inflation doesn’t want to stay down just yet.

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