Telling numbers: People walk past stores in central Sydney. The Australian Bureau of Statistics says the latest consumer price index fell to 4.1%, down from 5.4% in September, as inflation cools further. — AP
SYDNEY: Australia’s headline inflation cooled further in the final three months of 2023, reinforcing the case for the Reserve Bank of Australia (RBA) to keep interest rates unchanged next week and sending the currency lower.
The consumer price index (CPI) advanced 4.1% from a year earlier, coming in below economists’ estimate of 4.3%, the slowest pace in two years, government data showed yesterday.
A closely watched core inflation gauge, the trimmed mean, rose 4.2%, also less than forecast.
The data spurred bets on RBA rate cuts and sent the Australian dollar lower. The policy-sensitive three-year bond was headed for its best day in six weeks, with the yield down eight basis points to 3.64% and stocks gained.
Money market pricing implied a 70% chance of a cut in June, up from about 50% on Tuesday, and fully pricing an August move.
“The data and details are better than the RBA’s base case and will likely see downward revisions to its forecasts” next week, said Su-Lin Ong, chief economist at the Royal Bank of Canada. “Coupled with the shifting global central banking narrative, markets will likely bring forward the timing of RBA cuts.”
Central bank governor Michele Bullock has sought to slow inflation without choking off economic growth, and Australia’s 4.25 percentage points of rate increases since 2022 are at the lower end of the global tightening scale.
But the CPI data suggest Australia is moving closer to its developed economy counterparts.
The report showed quarterly inflation came in at 0.6%, half the pace seen in the three months through September and the smallest gain since March 2021.
“Today’s CPI outcome, along with weaker retail sales and a deteriorating labour market, raises the question: Was the RBA’s surprise November rate hike a policy mistake? We expect a material change in the RBA’s economic forecasts next week,” said economist James McIntyre.
Bullock has voiced concern about the stickiness of service prices in Australia and has warned the central bank’s willingness to take a bit longer to return inflation to target to preserve job gains has its limits.
Policymakers worry that the longer CPI remains above the 2% to 3% target, the more likely it is that inflation expectations will become unmoored.
The RBA’s recent forecasts showed inflation holding above the upper end of its target until late 2025.
The figures follow separate data this week that showed retail sales slumped by more than expected while the labour market is also cooling, further supporting the end of the RBA’s tightening cycle.
The data “put the ongoing disinflation well ahead of the schedule laid out in the RBA’s most recent forecasts”, said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia. “We expect we have reached the peak of the rate hike cycle.”
Langcake expects rate cuts to only begin in late 2024, given that inflation remains well above the RBA’s target.
The result comes as US inflation appears to be on a fast track to return to the Federal Reserve’s 2% target. — Bloomberg
