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February rate hike ‘cemented’ following ‘red hot’ inflation data

6 minute read

Most economists believe that a rate hike next month is almost certain after the latest CPI showed that annual inflation has now climbed to its highest level since 1990.

Economists widely expect that the Reserve Bank (RBA) will deliver its ninth consecutive rate hike at its next monetary policy meeting in light of the latest strong inflation data.

On Wednesday, the Australian Bureau of Statistics (ABS) reported that annual headline inflation had reached its highest level since 1990, with the consumer price index (CPI) rising 7.8 per cent in the year to December and underlying inflation increasing to 6.9 per cent.

While many had already been anticipating that the RBA would continue tightening into the new year, economists at the Commonwealth Bank (CBA) said that these “red hot” inflation figures should be the “smoking gun” for another 25 basis point (bp) hike in February.

“The RBA had expected inflation to peak at 8.0 per cent by the end of 2022. [Wednesday’s] headline inflation data was a little below their expectations. But the trimmed mean printed stronger than their forecast,” CBA head of economics Gareth Aird, senior economist Belinda Allen and economist Stephen Wu explained in an economic update.

“The RBA maintained a hiking bias at the December Board meeting. And we expect them to deliver on that bias at the February Board meeting. More specifically, we maintain our forecast that they will raise the cash rate by 25 bps to 3.35 per cent.”

After this move, which would equate to a total of 325 bps of monetary tightening since last May, the CBA economists then expect the RBA will elect to pause.

“Inflation expectations remain anchored and the recent business surveys suggest that inflation pressures are starting to dissipate, albeit from elevated levels. Notwithstanding, the risk sits with a further rate hike at the March Board meeting,” they said.

However, this “risk” is seen as being the central case for economists at ANZ. The bank’s senior economist, Catherine Birch, noted that the CPI data showed that momentum continued to build in domestically driven inflation pressures during the fourth quarter.

“This cements a 25 bp cash rate hike in February and supports our view of another 25 bp hike in March, especially if we see a solid print for Q4 wages in mid-February as expected,” she said.

The ABS is scheduled to release its next wage price index covering the December quarter on 22 February, ahead of the RBA’s second meeting of this year on 7 March.

Signs inflation has peaked, says Treasurer

While suggesting that Australia’s CPI figures remain “unacceptably high”, Treasurer Jim Chalmers stated that there were some signs that inflation has likely already peaked.

“While further monthly data and the figures from the March quarter will tell us more, we do expect inflation to moderate over the course of this year,” he said.

“There have already been a number of price pressures which have started to ease — including shipping costs and housing costs, which are welcome — but even so, price pressures will still remain higher than we’d like, for longer than we’d like.”

Dr Chalmers noted that the government’s economic plan will continue to focus on the challenge of inflation and growing the Australian economy “the right way” in the year ahead.

“We understand Australians are doing it tough. That’s why we will keep working hard to provide responsible cost‑of‑living relief, deliver the essential services people rely on, and build a stronger and more resilient economy for the future,” the Treasurer said.

Interest rate outlook: Other analysts weigh in

In Barclays’ view, the RBA is now more likely to announce a rate increase in February considering the inflation data. However, the investment bank believes that this will be the last.

“We continue to think that the bank will only hike one more time in this cycle and think that the timing for this hike will be the point of discussion within the bank as they meet for the 7 February decision,” Barclays said.

“A lower inflation print (relative to the bank’s expectation), falling commodity prices, indications of easing spare capacity in the labour market and softer house price inflation should add to the optimism that rate hikes have started to have some impact.”

But Barclays acknowledged that the inflation result was higher than the consensus view and its own forecast, and said this would not be enough to allow the RBA to pause next month.

“Indeed, price pressures are still quite high, spare capacity remains and the interest rate differentials with other major central banks — none of which have paused yet — also remain high,” it said.

“In our view, a weaker-than-expected labour market report for December was also not weak enough to hold back the RBA from hiking.”

Meanwhile, GSFM adviser Steve Miller said that the December quarter inflation figures represented some “seriously awkward optics” for the RBA.

He argued that the inflation outcome reaffirms the notion that the central bank’s comparative caution in raising its policy rate “was at best premature and at worse egregiously misplaced”.

“The missteps in RBA communication through 2022, including the ‘no increase in the policy rate before 2024’, have been well documented,” he said.

“However, it is more important to recognise that the substantive error that led to that flawed policy communication was the underappreciation of persistence, magnitude, and momentum in inflation. That underappreciation continues.”

According to Mr Miller, it is unclear whether the RBA has earnt from the post-pandemic period and the events that have transpired in previous decades, including the high and persistent global inflation of the 1970s that continued into the 1980s locally.

“The lesson from that period is that in terms of potential dislocations in activity and employment, the least costly path in containing inflation is to be aggressive early on in the piece,” he said.

“In my view, the RBA should now be possessed of an acute inflation anxiety as it approaches policy determination in 2023 and that a policy rate well in excess of the 3.60 per cent previously implied by domestic interest rate markets may be a more optimal path to long-term sustainable growth in activity and employment.”

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.