Australia’s Hot Inflation Builds Case for Election Rate Hike

04/27/2022

2 minutes read

2022.04.27 05:56

(Bloomberg) —

Australia’s core inflation breached the top of the central bank’s 2-3% target for the first time since 2010, sending the currency higher and boosting the case for an interest rate hike just weeks out from an election.

The annual trimmed mean gauge, a measure closely followed by the Reserve Bank, rose 3.7% in the three months through March, exceeding a forecast 3.4% increase, Australian Bureau of Statistics data showed Wednesday. On a quarterly basis, it advanced 1.4% versus a forecast 1.2% gain.

Swaps traders are now fully pricing in a 15-basis-point hike for next week’s RBA meeting that would lift the cash rate to 0.25%. The Australian dollar and three-year government bond yields also advanced following the report.

“Continued shortages of building supplies and labor, heightened freight costs and ongoing strong demand contributed to price rises for newly built dwellings,” said Michelle Marquardt, head of Prices Statistics at the ABS, said in a statement. “The CPI’s automotive fuel series reached a record level.”

The result intensifies pressure on RBA policy makers to initiate rate liftoff, having been accused of falling behind the curve given global counterparts have already embarked on tightening. The RBA has signaled its first hike is getting closer, though most economists expect it will keep the cash rate at a record-low 0.1% next week to avoid embroiling itself in the May 21 election.

Still, today’s strong report may be enough to prompt Governor Philip Lowe to abandon the RBA’s traditional political caution. Some economists see the central bank standing pat on May 3 and then delivering an outsized 40-basis-point move in June, with Goldman Sachs Group Inc (NYSE:GS). the latest to do so.

Inflationary pressures worldwide have been escalating, intensified by Russia’s war on Ukraine. Global supply chain disruptions driven by China’s stringent lockdowns to curb Covid-19 also suggest little prospect of an early abatement.

That has prompted a host of central banks including those in New Zealand and Canada to deliver jumbo rate hikes, with the Federal Reserve expected to follow suit.

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.

Today’s data also showed:

Headline inflation climbed 2.1% on a quarterly basis for a 5.1% annual gain
New dwelling purchase by owner-occupiers climbed 5.7% and automotive fuel jumped 11% on a quarterly basis
Price rises were seen across all food and non-food grocery products in the March quarter, reflecting a range of price pressures including transport costs, supply chain disruptions and increased input costs
Tradables prices, which are typically impacted by the currency and global factors, surged 6.8% annually
Non-tradeable prices, which are largely affected by domestic variables like utilities and rents, climbed an annual 4.2%

(Adds details from report.)

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04/27/2022

2 minutes read