The fortunes of Australia’s economy – and political polling of the Albanese government – may well hinge on the strength of Wednesday’s inflation numbers.
Economists expect headline consumer prices in the June quarter will land at an annual rate of 3.8%, accelerating from 3.6% in the prior three months. Core inflation – known as the trimmed mean – will be steady at 4%, a Bloomberg survey found.
The Reserve Bank’s own forecasts in May of 3.8% for both headline and core inflation for the quarter just ended were both elevated from its predictions early this year.
An upside surprise will likely heap pressure on the central bank to lift its cash rate to 4.6% – a 14th hike in this cycle – when its board meets next Monday and Tuesday.
The Australian Bureau of Statistics will release the inflation data at 11.30 AEST. Should it meet expectations – or even fall shy – the calls instead will be for early interest rate cuts to ensure an economy already close to stalling doesn’t sink into recession.
The RBA wants to be reassured inflation remains headed towards its preferred 2-3% range, a goal it currently expects will be achieved by the end of 2025.
Households and businesses with debt are hoping it won’t take another RBA rate rise to ensure that trajectory is retained.
Since the central bank began hoisting rates in May 2022, monthly mortgage repayments have increased about $240 per $100,000 borrowed, according to RateCity. Another quarter-point hike would add about $15 to the load and erode some of the government’s modified stage-three tax cuts delivering families about $240 a month.
The investment bank UBS is in the minority, predicting the RBA will hike its cash rate to 4.6% next week. CPI has remained above the bank’s target band for 12 consecutive quarters and the past three months will make it 13, it noted.
Governor Michele Bullock said in May the RBA board “has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected”, the bank noted. To do so “would risk eroding public credibility in our commitment to low and stable inflation”.
Even accounting for some stickiness in inflation, Australia would be almost alone among rich nations in considering another rate rise.
Only Japan, which in March lifted its key interest rate for the first time in 17 years as that nation’s deflation threat finally ebbed, is still considering raising borrowing costs.
Canada and the European Union have started cutting rates and the US may follow in September. That downward shift may give the RBA’s nine-member board additional cause to stay put – as it has done since last November.
Politicians have sought to frame the outcome knowing the possible boost – or hit – to the government’s standing may pivot on the ABS readings.
An election this side of Christmas would be in prospect if the government viewed the RBA’s job was done. Another rate rise, though, would likely delay any election until next May, when the term ends, as any rate relief hopes dim.
“Australians are in enormous pain because of Labor’s homegrown inflation crisis,” shadow treasurer Angus Taylor said, adding the country was the only one among the top 10 economies to have higher inflation compared with the end of 2023.
“Australians face higher prices, higher interest rates and higher taxes for longer because of Labor’s bad economic management,” Taylor said.
Treasurer Jim Chalmers said inflation was “persistent” in the June quarter but the government remained confident it would resume its moderation from now.
“We expect the big drivers on Wednesday to be things like insurance and rent and petrol, and of course petrol is impacted by the global oil price – and all this uncertainty we’re seeing in the Middle East,” Chalmers told ABC TV on Tuesday. “None of those factors are about government spending.”
Research out this week from the ANZ senior economist Blair Chapman noted much of this year’s inflation pulse was driven by so-called administered or indexed prices, such as university fees. These were immune from higher interest rates in the near term.
“Non-administered and non-indexed inflation has declined notably and is running around levels consistent with the RBA’s target band on a six-month annualised basis,” Chapman said.
In the March quarter, such items rose 3.3% year-on-year, down from a peak of 9%.
In other words, an RBA rate rise “would likely slow activity in interest rate-sensitive sectors, slow employment growth and add to unemployment”.
More reason to hold fire, then. Unless those CPI numbers light the fuse.
