(Bloomberg) — Australia’s headline inflation cooled further in the final three months of 2023, reinforcing the case for the Reserve Bank to keep interest rates unchanged next week and sending the currency and bond yields lower.
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The consumer price index advanced 4.1% from a year earlier, coming in below economists’ estimate of 4.3%, the slowest pace in two years, government data showed Wednesday. A closely watched core inflation gauge — the trimmed mean — rose 4.2%, also less than forecast.
The data boosted bets on a pivot to rate cuts in June 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 9 basis points to 3.63% and stocks gained toward a record high.
Money market pricing now implies 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 revision to its forecasts” next week, said Su-Lin Ong, chief economist at 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.
What Bloomberg Economics Says…
“Today’s CPI outcome, along with weaker retail sales and a deteriorating labor market, raise 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”
— James McIntyre, economist
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Bullock has voiced concern about the stickiness of services 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 had its limits. Policymakers worry that the longer CPI remains above the 2-3% target the more likely it is that inflation expectations will become unmoored.
The CPI data will feed into the RBA staff’s updated forecasts that will be released simultaneously with the board’s policy decision on Tuesday. The RBA’s most recent forecasts show 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 labor 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 inflation remains well above the RBA’s target.
Wednesday’s result comes as US inflation appears to be on a fast track to return to the Federal Reserve’s 2% target.
The CPI report also showed:
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Rent costs rose 0.9% in the quarter, slowing from 2.2% in the three months through September. The rate was moderated by changes to Commonwealth Rent Assistance, the ABS said
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Quarterly food and non-alcoholic beverage prices rose at the weakest pace since September 2021
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In contrast, over the past 12 months insurance jumped 16.2%, making it the largest annual rise since March 2001
–With assistance from Tomoko Sato, Garfield Reynolds and Matthew Burgess.
(Updates market moves)
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