Australia’s Inflation Concerns Prompt Speculation of Cash Rate Increase
Introduction:
Australia’s economy is facing increasing uncertainty as inflation continues to rise, prompting speculation about the possibility of a cash rate increase. Recent figures show that the monthly consumer price index (CPI) climbed by 4 percent in the year to May 2024, marking the third consecutive increase from 3.4 percent in February. As financial markets express concern over inflation growth, several financial institutions and economists have revised their forecasts for the cash rate.
The Potential for a Cash Rate Increase:
Deutsche Bank’s chief economist, Phil O’Donoghue, predicts that Australia’s official cash rate will rise significantly to 4.6 percent in August. Underlying inflation in Australia has been consistently increasing since December, making it the only G10 country experiencing this trend. In contrast, New Zealand has seen a drop in core inflation of nearly 0.2 percent since December 2023. The UK, Sweden, and Japan have also recorded significant falls in core inflation, with declines of around 1.7 percent and slightly above 1.5 percent, respectively.
Australia’s Temporary Disinflation Stall:
ANZ Bank senior economist Catherine Birch suggests that Australia may be experiencing a temporary stall in the disinflation process, similar to what the United States underwent earlier in 2024. However, she highlights that the May CPI figures could make the Reserve Bank of Australia (RBA) “a little nervous” and raise the risk of exceeding the RBA’s forecasts for annual growth of 3.8 percent in headline and trimmed mean inflation. If this occurs alongside upward revisions to the RBA’s expectations for economic activity and labor market data, it could prompt a cash rate increase.
The Role of Trimmed Mean Inflation:
AMP economist Shane Oliver points out that the significant increase in trimmed mean inflation raises the risk of another interest rate hike. While the CPI is on track to meet the RBA’s forecast of 3.8 percent for the second quarter, the trimmed mean is at high risk of surpassing its 4 percent forecast. Oliver suggests that the likelihood of another rate hike has now risen to around 40 percent. The June quarter inflation data will be crucial in determining whether the RBA decides to lift the official cash rate.
Conclusion:
Australia’s increasing inflation and rising trimmed mean inflation figures have raised concerns about a potential cash rate increase in the coming months. Economists and financial institutions have revised their forecasts, with predictions ranging from a significant rise to a temporary stall in disinflation. The RBA’s decision will be influenced by factors such as economic activity, labor market data, and the June quarter inflation results. As the situation unfolds, it is essential for stakeholders to monitor these developments and their potential impact on Australia’s economy.
