Market slowdown: The governor of the Reserve Bank of Australia still refers to the labour market as a bit tight and adds that monthly data can be volatile and she wouldn’t react to any one figure, remarks that financial traders and economists interpret as hawkish. — Bloomberg
SYDNEY: Australia’s core inflation accelerated beyond expectations last quarter, complicating the Reserve Bank’s path to further policy easing and prompting money markets to slash bets on a near-term interest rate cut.
Yields on three-year government bonds jumped the most since July after the closely-watched trimmed mean gauge of consumer prices, which shaves off volatile items, jumped 1% from three months earlier, when it rose an upwardly revised 0.7%, government data showed yesterday.
That was much faster than economists’ median of 0.8%. On an annual basis, core prices advanced 3%, to the top of the Reserve Bank of Australia’s (RBA) band, compared with expectations for a 2.7% increase.
The result “delivers the knockout blow to any remaining hope of a November rate cut,” said Ben Udy, lead economist for Oxford Economics Australia. “The upshot is that inflation is too hot and too widespread for the RBA.”
The data validate the central bank’s assessment that its efforts to rein in core inflation have hit an air pocket, posing a challenge to policymakers already grappling with early signs of a labour market slowdown.
The central bank aims to keep inflation around the midpoint of its 2% to 3% target.
The quarterly trimmed mean print of 1% represents a “material” miss from the RBA’s forecast of about 0.6%. Governor Michele Bullock earlier this week said a 30-basis-point deviation from the staff’s August projections would be “material” from her perspective.
Markets reacted sharply to yesterday’s data, with yields jumping 10 basis points to 3.55%, the most since July.
Financial traders all but erased expectations the RBA will cut at next week’s meeting, down from about a 40% chance pre-data. The RBA’s likely pause next Tuesday comes as the US Federal Reserve is expected to lower rates for a second consecutive meeting this week in response to threats to the labour market.
The RBA has eased policy three times since February, bringing the cash rate to 3.6%. Money market pricing now implies the next cut will only occur in May 2026.
In the most recent Bloomberg survey, economists had anticipated two more reductions between now and early 2026 for a terminal rate of 3.1%.
Some have cited recent weakness in the job market as cause for concern after data earlier this month showed unemployment unexpectedly jumped to 4.5% in September.
Bullock on Monday still referred to the labour market as a bit tight in comments to an economists’ forum. She added that monthly data can be volatile and she wouldn’t react to any one figure, remarks that financial traders and economists interpreted as hawkish.
“A re-acceleration in core inflation should see the Reserve Bank of Australia pause rates at its Nov 3 and 4 meeting, but some of the pickup appears transitory, suggesting easing will be delayed rather than derailed,” said economist James McIntyre.
Yestersday’s data showed discretionary spending, particularly travel and holiday-related activities, was notably strong in the quarter, up 1.3%. Non-discretionary jumped 1.4% in the period.
“Although seasonal in nature, the uplift in discretionary spending is significant,” said Devika Shivadekar, an economist at consultancy RSM Australia. “Importantly, the early rate cuts appear to be filtering through, boosting consumer confidence and encouraging spending. This renewed momentum is likely to catch the RBA’s attention.” — Bloomberg
