Q1 inflation ends Australia interest rate cut hopes for 2024

Australia interest rate cuts hopes fade as inflation slows less than expected in Q1

Australian consumer price inflation in the first quarter slowed less than expected due to persistent high costs in services, disappointing policymakers and leading markets to dismiss prospects of interest rate cuts this year.

The Australian dollar jumped by 0.6% against USD to trade at $0.6522, and three-year bond futures fell 15 ticks to 96.00, marking a yearly low.

Markets, rattled by the data, now see a mere 4% possibility of a rate hike by August. Australia’s interest rate cut hopes seem to have all but evaporated this year, with expected easing cut to just 3 basis points from 17 basis points previously.

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Australia inflation rate exceeds forecasts, comes in at 3.6% YoY in Q1

According to the Australian Bureau of Statistics on Wednesday, the consumer price index (CPI) climbed 1% in the first quarter, surpassing expectations of a 0.8% increase.

Year-over-year CPI inflation slowed to 3.6% from 4.1%, driven by base effects, but still exceeded predictions of a drop to 3.5%. In March, Australia’s CPI inflation rose 3.5% year-on-year — up from 3.4% in February.

The trimmed mean, a key measure of core inflation, also rose 1% in the first quarter, topping forecasts of 0.8%, with its annual rate slowing to 4% from 4.2%.

Madeline Dunk, an economist at ANZ that forecast a first Australia interest rate cut in November, commented on the market’s reaction to the figures to Reuters:

"It's higher than we were expecting, higher than what the market was expecting and higher than what the RBA would be expecting, so that 1% number will be something that they'll be alarmed about. I think the RBA will want to be seeing those services and non-tradables numbers decelerate in Q2 and if we don't see that there is a chance we see those rate cuts get pushed out to next year”.

Westpac has now postponed its forecast for the first rate cut to November from September, citing slower disinflation progress and a robust labor market.

Oxford Economics: Chances of Australia interest rate cuts in 2024 have “slimmed”

The Reserve Bank of Australia has kept the interest rate at 4.35% for three consecutive meetings, buoyed by earlier confidence that inflation was moving towards the 2-3% target range expected by late 2025.

Yet, policymakers remain wary of any policy changes amid a tight labor market. The central bank has increased Australia’s interest rates by 425 basis points since May 2022 to control soaring prices.

The latest quarterly report highlighted several unwanted milestones, including the steepest increase in education fees since 2012, the largest rise in rents in 15 years, and the highest surge in insurance costs in 23 years.

The divergence between tradable and non-tradable goods prices, with non-tradable goods inflation, primarily driven by domestic demand, remained high at 5.0%, whereas tradables increased by just 0.9% year-on-year.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, told Reuters:

“The strength in underlying inflation highlights that further disinflation from here will be frustratingly slow. The chances of a cut in interest rates coming in 2024 have slimmed”.

Globally, investors are tempering their interest rate cut expectations as the path to achieving inflation targets appears increasingly challenging. In the U.S., market expectations have shifted from anticipating nearly five rate cuts to fewer than two by year's end.

At the time of writing on Wednesday, April 24, the Australian dollar traded at $0.6506 against the U.S. dollar, giving up some of its earlier gains that followed the data release.

The U.S. dollar index (DXY) was last up 0.15% at 105.83. It has gained over 1.4% so far this month and remains up close to 4.5% year-to-date.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.