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Spike in inflation could spark another rate hike

4 minute read

Looming risks, including a pickup in inflation, could lead to another rate hike this year.

The Reserve Bank of Australia (RBA) is expected to have a tough meeting on Tuesday, the first chaired by new governor Michele Bullock, following a spike in inflation on Wednesday.

Inflation rose by 5.2 per cent in the 12 months to August, up from 4.9 per cent in July, on the back of a lift in fuel prices.

But despite this widely expected increase, economists generally believe that an immediate response from the RBA is unlikely.

Instead, they agree that with inflation holding well above the central bank’s target range of 2 to 3 per cent, a rate hike towards the end of the year is a distinct possibility.

Speaking with InvestorDaily, AMP deputy chief economist Diana Mousina warned that higher oil and food prices could contribute to higher inflation outcomes moving forward.

“It just depends to what extent they keep going up, and also there’s some upside risks to wages growth,” she said.

“There are still some risks on the horizon which keep the chances of an RBA rate rise alive. That could happen before the end of the year but it’s not our base case at this current point in time.”

The August CPI indicator showed that services inflation – a key concern for the RBA – remained sticky at 5.6 per cent year-on-year.

“You can still see there are parts of inflation that are still obviously too high. Services prices are elevated, some food inflation is still elevated too, so the job’s not done on getting inflation down,” said Ms Mousina.

She, however, highlighted that no one expected CPI to decrease to 3 per cent at this point in time.

“We’ve seen the peak at 8.4 per cent, it’s come down now to 5.2 per cent. We’re on the right path and we think there’ll be some further slowing in inflation ahead.”

According to Ms Mousina, the latest inflation figures will not impact the October rate decision.

“I think the RBA will still talk about doing a rate rise in October – deliberate whether they should – but we think that they’ll choose to pause and keep the cash rate unchanged,” she said.

While AMP doesn’t currently expect, with certainty, another rate hike, Ms Mousina did acknowledge the possibility of a rate increase in December.

“I think the Reserve Bank will be worried about the wages story, and the next set of wages data comes out in November, so I think that they’ll wait to see the wages data and then they’ll make their decision. So that would mean a December potential rate rise,” she explained.

The August CPI indicator was in line with market expectations, while the RBA itself flagged the possibility of an increase at its last meeting in September given heightened fuel prices.

Commenting on the CPI data on Wednesday, Commonwealth Bank economist Stephen Wu said the CBA views the spike as temporary.

“We think the RBA will be inclined to see it that way too when it meets next Tuesday for the October rate decision,” he said.

“We don’t anticipate the August CPI will alter their view [that] the current cash rate of 4.1 per cent is restrictive enough to pull inflation back inside the target band. Spare capacity in the labour market is rising amid the strength in labour supply and will weigh on further wages growth.

“Further tightening in financial conditions will continue even as the RBA remains on hold for the rest of the year. Lags in the cash flow transmission channel mean that borrowers have only felt about two-thirds of the 400 basis points of cash rate increases so far.”

Meanwhile, HSBC chief economist Paul Bloxham has pencilled in another 25 basis point hike in the fourth quarter, but similarly does not think that the latest monthly CPI indicator will be enough to get the RBA over the line to hike at its next meeting.

“Rather, we think the RBA is more likely to wait for the official quarterly CPI to get a more-comprehensive read, alongside the next labour market print,” he said.

“However, today's inflation print highlights some risks, and we cannot rule out the chance that a rate hike is on the table next week.”