Eyes on quarterly data after soft inflation surprise
Weaker-than-expected inflation figures have raised mortgage holders’ hopes that the Reserve Bank will refrain from hiking rates next month, but the real test won’t come until the end of January.
Inflation figures released by the Australian Bureau of Statistics on Wednesday showed the consumer price index remained flat in November, with the annual rate falling from 3.8 per cent to 3.4 per cent.
The RBA will be paying close attention to the data, given Governor Michele Bullock’s warning in December that it may have to raise rates if inflation persists.
However, the central bank’s board of directors will not make its decision until it sees the quarterly inflation data to be announced on January 28.
The ABS’s relatively new measure of monthly inflation lacks historical data to accurately adjust for seasonal changes, and monthly data fluctuates more than quarterly data.
The most important figure to watch will be the December quarter shortened average, which excludes variable items such as electricity, which have jumped wildly in recent years due to government energy rebates.
Commonwealth Bank economist Harry Ottley said November figures showed the shortened three-month average at 0.9 per cent; This is a “disturbing figure” that would force the RBA to raise the cash rate by 25 basis points.
Baseline, or reduced average, inflation remained above the bank’s 2-3 percent target of 3.2 percent, and sticky components such as rents and home construction costs were still running hot.
This will be of particular concern to the RBA board.
Minutes of the last meeting in December revealed that the board was undecided on whether the latest inflation increase was due to temporary or permanent factors.
If the latter had happened, it might have been forced to raise interest rates again.
Judging by the alarming growth in housing components, including a 0.4 per cent increase in monthly rents and a 0.5 per cent increase in new homes, Ms Bullock’s fears of persistent inflation may be justified.
But Westpac’s Justin Smirk said the November figures meant the December quarter shortened average could be below even the bank’s 0.8 per cent flat forecast, which would put the RBA on track to keep interest rates steady in February and the rest of 2026.
Another important indicator for the Central Bank will be the first workforce update of the year on January 22.
RBA board minutes revealed it believes the job market is still somewhat tight.
If the unemployment rate remains at a relatively low level of 4.3 per cent, the RBA’s fears about capacity constraints in the labor market could increase.
However, AMP economists Diana Mousina and My Bui expect unemployment to rise further this year, given signals from leading indicators of the labor market.
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