Australia’s Core Inflation Cools, Vindicating RBA’s Rate Pause

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(Bloomberg) — Australia’s core inflation decelerated in the first three months of 2023, lending weight to the Reserve Bank’s view that prices will steadily come down and supporting the case for it to extend an interest-rate pause.

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The currency fell and swaps traders boosted bets that the central bank will stand pat next week after official data showed the RBA’s preferred trimmed mean gauge slowed to 6.6% from a year earlier, compared with 6.9% in the final three months of 2022. On a quarterly basis, core prices also beat expectations.

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“Clearer signs of a peak in overall inflation, a disinflationary trend in goods, and strength in services prices that the RBA has little influence over will likely see this pause extend,” said Su-Lin Ong, chief economist at Royal Bank of Canada. “Accordingly, we remove our final 25-basis point hike in May and think that this tightening cycle is likely complete.”

Australia’s inflation trajectory is similar to those of the US and New Zealand, where the pace of price gains also eased. The RBA’s 10 consecutive hikes appear to be gaining traction, validating policymakers’ decision to hold rates at 3.6% this month and money market bets the central bank is all-but done. 

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Wednesday’s report showed the headline consumer price index advanced 7% from a year earlier, down from 7.8% in the prior period. The result ends five straight quarters of accelerating price pressures. 

While RBA policymakers will consider prolonging their pause, the Federal Reserve is expected to raise rates by a quarter point at its upcoming May 2-3 meeting, though some officials have said they’d like to pause at some point. 

Australia’s 3.5 percentage points of hikes is well below New Zealand’s 5 points and 4.75 points by the Fed, reflecting the RBA’s desire to preserve employment gains made during the pandemic. 

What Bloomberg Economics Says…

“We had been expecting the RBA to hike one last time at its May 2 meeting, but the 1Q data now suggest it’s likely to stay on hold — and potentially cut rates as soon as 4Q23”

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— James McIntyre, economist

Read the full report here

Governor Philip Lowe has, however, reiterated that he will do “what is necessary” to bring inflation back to the central bank’s 2-3% target. That explains the RBA’s tightening bias as well as economists’ expectations of one more hike this year for a terminal rate of 3.85%. 

“Inflation remains uncomfortably high, amidst a very resilient labor market and strong business conditions, which means there is still a case for at least one more rate hike,” said Cherelle Murphy, chief economist at EY. 

Today’s data showed easing prices of furniture, household appliances, clothing and fuel were behind the slowdown, while gains were still solid in non-discretionary goods and services: new dwellings were up 12.7% and electricity surged 15.5%.

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Today’s report also showed:

Inflation is still “unacceptably high,” Treasurer Jim Chalmers said after the release, adding that the May 9 budget will provide targeted cost-of-living relief to households, address supply-side problems and invest in future growth. 

—With assistance from Tomoko Sato and Garfield Reynolds.

(Adds comments from RBC and Bloomberg Economics.)