Australia’s Consumer Price Index (CPI) fell short of market expectations, with headline inflation falling to 6.8% in February from 7.4% YoY in January. Despite inflation being less than initially anticipated, economists at ANZ Bank still believe that it will support a rate hike at the Reserve Bank of Australia’s (RBA) next meeting in April.
The annual inflation of 6.8% in February, which is down from the peak of 8.4% in December, confirms that the country passed the peak of inflation in Q4. However, it is essential to note that Australia’s monthly CPI indicator demonstrates that the inflation momentum remains strong and is not slowing as much as the decline in annual inflation would suggest. These previous data releases offer comfort to ANZ, where they state that the RBA will increase the cash rate by 25 bps at its April meeting.
Although the RBA has signalled its intention to pause, in the coming months, ANZ bank believes that the data is not yet consistent with a pause. Therefore, their call remains firm that the central bank will increase the rate due to inflation pressures.
The CPI measures the weighted average price of a basket of goods and services, including food and beverage, housing, transport, education, and healthcare, among others. The fall in annual inflation is attributed to a decline in oil prices that affected fuel costs in Q4 last year. The RBA has attributed the recent increases in inflation to the supply chain disruptions of goods, such as semiconductors and consumer electronics, owing to the pandemic’s impact.
The RBA had previously stated that it would keep the cash rate at 0.1% until 2024, with the central bank expecting that the country’s inflation rate remained within its target range of 2% to 3%. However, with the Q4 peak, the annual inflation rate exceeded the range making it necessary for the bank to consider starting tapering and rate hike earlier than scheduled.
The central bank has regularly used accommodative monetary policy to aid the economic recovery from recession, but rising inflation poses a challenge to its policy. Although the RBA has a taskforce aimed at monitoring and responding to the effects of climate change on financial stability and regulatory reform and observed the commitment to monetary and fiscal policy coordination to achieve full employment and price stability, the rate hike may affect Australian households, where they will be forced to pay higher mortgage rates.
In recent weeks, global bond yields have increased as investors shift to higher risk appetite and increased prices due to expectations of rising inflation, increasing the cost of borrowing could curb inflation. ANZ Bank suggests that the RBA will follow other global central banks such as the US Federal Reserve, which has signaled their plans to keep accommodative monetary policy and rate hikes on pause until the economy reaches full employment and sustainable inflation.
The RBA has continued to maintain its stand for a flexible monetary policy that will respond to economic conditions. Therefore, it is essential to consider the inflationary pressures that the country is currently facing and balance these by supporting a stimulus-led recovery.
In conclusion, the decline of Australia’s inflation rate in February compared to January suggests that the country passed peak inflation in Q4 last year. However, Australia’s monthly CPI indicator informs that inflation momentum remains strong and is not slowing as much as the fall in annual inflation suggests. Therefore, ANZ Bank believes that the RBA will increase the cash rate by 25bps in April, despite pausing in the coming months. The rate hike may affect Australian households as they would face higher mortgage rates; however, it is necessary to manage inflationary pressures with a stimulus-led recovery that will assist the economy’s growth.