Australia's inflation accelerated unexpectedly in the first quarter of 2024, indicating persistent price pressures that may compel the Reserve Bank of Australia (RBA) to maintain its interest rates at the highest level in twelve years.
The latest data revealed on Wednesday showed the consumer price index (CPI) rose 3.6% year-on-year, slightly above the 3.5% predicted by analysts. More notably, core inflation, measured by the trimmed mean, increased to 4%, surpassing both expectations and the RBA’s comfort range of 2-3%.
All Groups & Trimmed Mean (YoY %)
In response to the inflation report, the financial markets adjusted their outlook. The yield on three-year government bonds, which are sensitive to policy changes, surged by 18 basis points to 4.03% — the most significant rise since last May. Consequently, the probability of an RBA rate cut by December, previously seen as likely, has dramatically reduced.
The Australian dollar has risen following the release, gaining 0.53% to 0.6518 as traders reassessed the interest rate trajectory.
This inflation report follows recent employment data indicating a still-tight labor market in Australia, likely influencing the RBA’s upcoming economic forecasts. Amidst global concerns over entrenched inflation, evidenced by recent data from the US, Australia’s CPI figures have stoked similar worries, and understandably pared back expectations of rate cuts.
While the RBA has adopted a patient stance under Governor Michele Bullock, aiming to curb inflation gently by 2025, the current data suggest that maintaining economic stability without aggressive measures could be challenging. As the markets and policymakers digest these figures, the upcoming May 7 policy decision by the RBA in focus, with expectations of stern warnings against potential rate hikes, although actual increases are unlikely to be imminent.
