Australia’s Elevated Inflation Backs Tight RBA Policy Stance

Article content

(Bloomberg) — Core inflation in Australia remained high in the fourth quarter, reinforcing the Reserve Bank’s view that price pressures will take time to dissipate and that monetary policy should remain restrained for now.

Data from the Australian Bureau of Statistics showed on Wednesday that average consumer prices, which smooth out volatile elements, rose 0.8% in the three months to September, in line with estimates. On an annual basis, the average rose by 3.5%, which is also in line with expectations. The RBA is focusing on core CPI as government subsidies suppress headline prices.

Article content

Currency and sensitive three-year government bonds changed little after the issuance.

These figures are largely in line with the Reserve Bank of Australia’s inflation forecasts. Bank Governor Michelle Bullock said in the bank’s annual report released last week that she expects it will take “another year or two” before consumer prices return sustainably to the 2-3% target level. The Reserve Bank of Australia will release a new round of economic forecasts on Tuesday with its policy decision.

Sean Callow, senior foreign exchange market analyst at In-Touch Capital Markets, said the result “should reinforce the RBA’s current view that inflation will not be sustainable within the target range for a while,” suggesting limited changes to its quarterly forecasts next week. “.

The slow pace of decline in inflation reflects Australia’s lower peak interest rates than its international counterparts, with the Reserve Bank of Australia concerned about the ability of highly indebted households to make significantly higher mortgage repayments. The central bank has kept its key interest rate at a 12-year high of 4.35% since last November, and most economists do not expect a cut before February 2025.

Article content

Article content

Policymakers at the Reserve Bank of Australia said they were alert to upside risks to prices from a potential rise in consumer spending following the government’s income tax cuts that began in July, as well as from global geopolitical and trade tensions. They have repeatedly said that aggregate demand still exceeds the supply capacity of the economy.

It remains unclear whether households are saving or spending the extra money, but if they are consuming, economists fear that inflation’s return to target may be slower than expected. Thursday’s retail sales data will provide some guidance on demand in the economy.

The government also provided energy subsidies to help reduce inflation. The report showed that the headline consumer price index fell to 2.8% in the third quarter compared to the previous year, which is lower than estimates that indicated an increase of 2.9%.

What does Bloomberg Economics say…

“The RBA will likely be cautiously pleased with the third-quarter CPI, but the relative decline in consensus will not be enough on its own to prompt the central bank to cut interest rates at its November 4-5 meeting.”

—James MacIntyre, economist

For the full memo, click here

Article content

Wednesday’s data follows a strong employment report from earlier this month and highlights the progress the Reserve Bank of Australia has made in holding on to post-pandemic job gains, another reason it has not raised its cash rate as high as its global counterparts.

“Although today’s numbers are a step in the right direction, concerns surrounding the ongoing tightness in the labor market give the RBA every reason to maintain the status quo at 4.35%,” said Devika Shivadekar, an economist at consultancy RSM Australia.

Wednesday’s inflation report also showed:

• Annual services inflation was 4.6% in the third quarter, slightly higher than the previous period and has remained at around 4.5% over the past 12 months, the Census Bureau said. Rents, insurance, education and medical services led the gains
• Prices of non-tradable goods, which are largely affected by local variables such as utilities and rents, rose 4.1% year-on-year.
• Prices of tradable goods, which are typically affected by currency and global factors, rose 0.6%.

-With assistance from Michael J. Wilson.

(Adds more details and comments from analysts).

Article content