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Inflation trajectory could mark early rate reversal: ING

By Charbel Kadib
4 minute read

The latest quarterly inflation data has been released, confirming a sustained improvement towards the Reserve Bank’s target range but casting doubt over expectations of a prolonged pause to rate hiking. 

The Australian Bureau of Statistics (ABS) has published its latest Quarterly Consumer Price Index (CPI), reporting a 1.4 per cent rise over the three months to 31 March 2023, down from 1.9 per cent in the December quarter. 

The March result represented the slowest quarterly growth since December 2021.  

However, annualised inflation was slightly above market expectations, falling to 7 per cent — 0.8 percentage points lower than the December quarter peak of 7.8 per cent. 

Three of the big four banks anticipated the quarterly result, with ANZ the only major bank to forecast a weaker annualised growth of 6.9 per cent. 

Medical and hospital services costs (4.2 per cent), tertiary education (9.7 per cent), gas and other household fuels (14.3 per cent), and domestic holiday travel and accommodation (4.7 per cent) were the biggest drivers of the CPI increase over the March quarter. 

Offsetting the rise was an 8.2 per cent decline in the costs of international holiday travel and accommodation, attributed to the start of the “off-peak season”. 

An increase in discounting activity by retailers also drove reductions in the cost of furniture (4.6 per cent), major and small appliances (3.8 per cent and 3.6 per cent), and clothing (3.2 per cent).

The March quarter result is expected to undermine expectations of a prolonged pause to the Reserve Bank of Australia’s (RBA) monetary policy tightening cycle, given the annualised rate surpassed market expectations.    

In minutes from its April board meeting, the RBA said the quarterly CPI data would play a key role in determining the central bank’s next rate move. 

ANZ Research had said an “upside surprise” to the upcoming quarterly CPI data would support an earlier than expected resumption of monetary policy tightening. 

The Commonwealth Bank went one step further, claiming March quarter CPI would “make or break” the case for the RBA to raise the cash rate at the May board meeting. 

CBA’s base case is for one final 25 bps hike in May, taking the cash rate to a peak of 3.85 per cent, but acknowledged it would be a “line ball call”.

The release of the quarterly CPI data coincided with the publication of the ABS’s new monthly series, which reported 6.3 per cent headline inflation over the 12 months to 31 March 2023, down 0.5 percentages points from the previous month and 1.1 percentage points from January. 

This was below expectations of a 6.5 per cent increase. 

According to Robert Carnell — ING Economics’ regional head of research, Asia-Pacific — the monthly result suggests faster progress towards the target range of 2–3 per cent. 

He said month-on-month inflation of around 0.3 per cent in April would enable inflation to “at least tread water” until “base effects in the subsequent months”.

Accordingly, a 0.2–0.3 per cent month-on-month run rate could “pull inflation down” into the 3–4 per cent range by the end of 2023. 

“If there is no repeat of last year’s food and energy price spikes, then it is just possible that inflation will fall back within the RBA’s 2–3 per cent inflation target range when the December CPI data is released in early 2024, a full year ahead of the RBA’s forward guidance for inflation,” Mr Carnell said. 

In this context, the RBA could reverse its monetary policy strategy earlier than initially anticipated.  

“…We believe that there is a fair chance that not only did 3.6 per cent mark the peak for the cash rate, but that we could also see the cash rate being trimmed before the end of this year,” Mr Carnell added. 

However, during his address to the National Press Club in Sydney following the April decision, RBA governor Philip Lowe said the central bank does not envisage a shift to an easing bias any time soon.

“I do think it’s premature to be talking about interest rate cuts,” he said.

“Remember, we’ve got the highest inflation rate in 30 years, the lowest unemployment rate in 50 years, and still two years before we get inflation back to the top of the target range.

“So, I think it’s too early, way too early, to be talking about interest rate cuts and the balance of risk lie to further rate rises, but it will depend upon the data.”

The governor went on to note the central bank is prepared to keep interest rates “higher for longer”.

“If we need to keep interest rates higher for longer to make sure that inflation comes back to 2 to 3 per cent range [in a] reasonable time, we’ll do that,” he said.

“But that will be determined by the flow of events.”