Australian Dollar: Inflation Rises to 3.6% and Sparks Speculation of Further Hikes

May 29, 2024 - Written by David Woodsmith

STORY LINK Australian Dollar: Inflation Rises to 3.6% and Sparks Speculation of Further Hikes

The RBA have their work cut out getting inflation under control.

April’s CPI figures were higher than expected and rose across a number of sectors.

Rate cuts look unlikely this year and speculation is growing the next move may be a hike if data continues to disappoint.

Inflation remains the market’s main focus and the bounce back we saw in the US earlier this year appears to be making its way to other countries which still seem to follow the inflationary trends in the US with a lag. Last week’s UK CPI beat expectations and showed services inflation too hot to justify a June cut. Similarly, Wednesday’s CPI release in Australia came in hot with a year-on-year reading of 3.6%, which was higher than last month’s 3.5% and some way above the 3.4% estimate. This has boosted the Australian Dollar slightly but may not be such a large driver in the near-term as there was never any chance of a June cut from the RBA, and they may not cut at all this year.

Australian Inflation Remains Uncomfortably High

Wednesday’s CPI readings will make the RBA uncomfortable. A headline figure of 3.6% is far, far away from its target and moving in the wrong direction with an increase from last month's 3.5% print. The situation is particularly concerning as the drivers do not look like isolated events. Indeed, the numbers would have looked even worse if it were not for a –1.9% drop in electricity prices. This was due to a second instalment of the Energy Bill Relief Fund for concession and newly eligible households in Tasmania.

Durable goods prices rose, with clothing & footwear up 4.0% in the month. There was also a solid 2% increase in medical & hospital services in April. Housing was softer than expected at 0.1% vs 0.9% forecast so there are at least some positives.

All in all, the figures for April do suggest the Q2 forecasts may have to be adjusted higher and Westpac highlight the upside risks,

“As noted earlier, the quarterly surveyed clothing & footwear prices were stronger than expected which will see an upwards revision to these components in our June quarter CPI forecast. Assuming all else is held constant, this would suggest an upward revision to our forecast.”

Higher projections are bad news for the prospect of cuts which were already looking unlikely this year. Given the slow progress bringing inflation under control, the likely start date is now in early 2025, and there may be some speculation on a further hike from the RBA. After all, the Bank stopped hiking at a relatively low rate of 4.35% and the neutral rate may be higher. Most central banks opted to hold rates around the 5% level and they have had better results bringing inflation down. If inflation stagnates around the 3.5% area for much longer, the RBA may run out of patience. Moreover, one or two hotter inflation reports could get them worried enough to make a flurry of hikes. As ING noted:

“... we would be dishonest if we did not consider that the risks have shifted to the possibility of some further RBA tightening. For that, we will let the data decide. But we are now only one bad inflation report from amending our forecasts to include some additional tightening.“

This could be good news for the Australian Dollar and both it and the New Zealand Dollar have performed well in May. Indeed, the “Aussie” leads the 3-month performance table among G7 currencies. Much of this is recovering lost ground in previous periods, but should the RBA turn decidedly hawkish and signal further cuts, the rally could extend. AUDUSD currently trades at 0.665 but could have a clear run at the December ‘23 high of 0.689.

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TAGS: Australian Dollar Forecasts