The debate over whether Australia’s central bank should deliver its last cycle of policy tightening will be resolved with the release of monthly inflation data this week – and the currency is set to be swept up in the fall.
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Published on 28 Jul 2024 • 3 minutes of reading
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(Bloomberg) — The debate over whether Australia’s central bank should deliver its last cycle of policy tightening is likely to be resolved with the release of monthly inflation data this week — and the currency is set to be swept up in the fall.
Core consumer prices may have advanced 3.8% in the second quarter from a year earlier, from 3.6% in the previous period, economists predicted ahead of Wednesday’s release. The main core measure, truncated average inflation, which reduces volatile prices, appears to have been held at 4%. That is above the Reserve Bank’s latest forecast of 3.8% and suggests limited progress in reining in prices.
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“If the inflation is four-point and they do not raise, it must start to bite into the confidence of the war-inflation,” said Stephen Miller, and investment strategist at GSFM. “What we can emphasize is the long-term outcome of the Australian struggle and certainly the US cannot do it.”
The Reserve Bank has raised rates less than its global counterparts as it seeks to boost employment amid concerns about the capacity of heavily indebted households to cope. Stubborn inflation that suggests the RBA will fail to meet its goal of bringing prices back to its 2%-3% target by the end of next year will require further hikes – and risk pushing the weakened economy into recession.
The price report came on the heels of higher-than-forecast job growth and strong retail sales, while business survey measures remained resilient. Some prices rose more than expected for the third month in May, raising questions about whether the policy is “restrictive enough.”
The RBA has promised to be “vigilant” about the risk of price rises and the rate-setting board considered a rise in June, before deciding to stand at 4.35%. Although the odds are lower than earlier this month, money markets are still pricing in a one-in-five chance that the Reserve Bank will raise rates at its August 5-6 meeting.
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“Inflation in Australia is still high relative to our global peers,” said Diana Mousina, deputy chief economist at AMP Ltd. its inflation goal.
Economists predict inflation will rise 1% from the previous three months.
It’s not just financial markets and policymakers who are nervously awaiting the print. A cooling of inflation and an end to rate-rise talks will open the door for the center-left government to call elections early this year. Faster price growth and the threat of more tightening will likely eliminate it.
Inflation may have been driven in the last quarter by housing rents and housing costs as well as insurance and financial services. In addition, fiscal spending remains strong, especially at the country level, boosting demand and prices.
Australia’s policy caution is nearing the end of the global cycle as the RBA is discussing a hike while some of its peers are already easing. The Bank of Japan is an outlier, with Bloomberg Economics predicting a hike on Wednesday.
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Elsewhere, the Bank of Canada has cut rates again while the European Central Bank has also lowered rates. China, which is Australia’s main trading partner, has reduced borrowing costs.
The Federal Reserve is likely to lay the groundwork for a September pivot at its meeting this week. A particularly dovish Fed may caution the RBA against hiking.
“With China easing and the risk of the Fed and other advanced market central banks easing on the horizon, the RBA is highly aware of the fine tuning of monetary policy when the pulse has changed to the downside,” said Prashant Newnaha, a Singapore-based senior rates strategist at TD Securities.
Newnaha pointed to the recent sell-off in the Australian dollar saying “CPI is unlikely to escape the slide.”
The Aussie has fallen nearly 2% against the dollar this month, among the worst performing developed market currencies as risk sentiment was hit by falling commodity prices and worries about China’s economy. This is a reversal for the currency, which has been the best performer in the RBA hike bets.
—With assistance from Shinjini Datta and Ben Westcott.
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