In the third quarter, inflation in Australia unexpectedly surged, posing a significant challenge for policymakers and substantially elevating the likelihood of an interest rate increase as early as the following month.
Futures currently indicate a 66% probability of a quarter-point rate hike, pushing it to 4.35%, up from the prior estimate of 35%.
The Australian Bureau of Statistics reported that the Consumer Price Index (CPI) for the third quarter rose by 1.2%, surpassing market expectations of 1.1%. This is in contrast to the 0.8% increase observed in the previous quarter.
Although annual inflation declined from 6.0% to 5.4%, it still exceeded the projected rate of 5.3%. In September, the year-over-year increase in the Consumer Price Index stood at 5.6%, up from 5.2% in August.
A key gauge of core inflation, the trimmed average, also saw a 1.2% rise in the third quarter, surpassing the anticipated 1.1%. That being said, the annual value of this indicator dropped from 5.9% to 5.2%.
Two of Australia's four largest banks, Commonwealth Bank of Australia and ANZ, have adjusted their predictions and are now anticipating a quarter-point rate increase in November. They claim that 4.35% may potentially end up being the peak interest rate, although there remains a risk of further tightening.
In response to these developments, the Australian dollar appreciated by 0.5%, reaching a one-week high of $0.6385, while three-year bond futures declined by 15 points to 95.68, marking their lowest level since 2011. Market expectations now point to interest rates peaking at 4.46% in the early months of the upcoming year, up from the previous estimate of 4.35% prior to the release of this data.
An interest rate increase would place the RBA in a unique position, making it one of the few central banks in developed countries to continue with a tightening monetary policy. In contrast, the US Federal Reserve and the European Central Bank put rate hikes on hold, the market believes.
The RBA's recent statements have displayed a more hawkish tone. In her first public speech, the central bank's new governor, Michelle Bullock, expressed the possibility of raising interest rates in the event of a significant upward adjustment to the inflation projections.
In August, the RBA had anticipated that inflation would return to the upper boundary of the bank's target range of 2-3% only by the end of 2025. The central bank intends to unveil its revised economic forecasts in early November.
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