Australia’s inflation is still too high, which would be music to the Reserve Bank of Australia (RBA)’s ears if it weren’t for their current predicament. Consumer Price Index Recent data released indicate that inflation came in hot at 3.6% YoY, coming in marginally higher than last month’s 3.5%. This figure, which will be published two weeks before the RBA’s monetary policy meeting scheduled for December 8-9, indicates that inflation has surpassed the bank’s target range of 2-3% for the first time since early 2023.
During its November meeting, the RBA kept its Official Cash Rate (OCR) at 3.6%. Policymakers recognized that inflation has clearly moved well above their target and have indicated some alarm about its likely path going forward. Inflation is unlikely to drop below 3% for the better part of next year. In late 2027, it is expected to fall to the center of that target range, setting the central bank up for a tricky tightrope act.
Understanding Inflation Metrics
Inflation is usually expressed in terms of a percentage change, both on a month-on-month (MoM) and year-on-year (YoY) basis. The YoY reading is compared across a month in question to the same month a year beforehand. This method provides a more holistic view of price changes. Even worse, core inflation—excluding housing, food and energy—is what central banks adopt as their target. For instance, the Federal Reserve seeks to keep inflation low and stable, usually at 2%.
Nobody thinks core inflation is a good overall measure of inflation—that’s why economists look so closely at core inflation. When core CPI crosses that 2% mark it typically results in an interest rate hike. On the flip side, when it goes under this threshold, it becomes conventional wisdom that central banks should start reducing rates to boost economic growth.
Meanwhile, Australia’s quarterly inflation rate popped up to 1.3% for the three months ended in September. This is the largest quarterly jump in percentage terms since the first quarter of 2023. Rising electricity prices, in turn, have fueled a national spike in inflation. This caused the annual inflation rate to leap from 2.1% in Q2 to 3.2%.
Market Reactions and Predictions
As could be expected, market analysts are watching these inflation trends with a hawkish eye, for they would likely have major ramifications on monetary policy actions. If annual inflation results fall below 3%, many market players may rush to bet on an RBA interest rate cut. A situation like this would put significant downside pressure on the AUD/USD.
Valeria Bednarik, a financial analyst, commented on the current state of the AUD/USD pair:
“From a technical point of view, the AUD/USD pair has decelerated its slide, but the risk remains skewed to the downside.”
The ramifications of these projections are incredibly important to our investors and to our policymakers. With inflation still running hot, the landscape in terms of interest rate expectations and currency valuations is bound to change again.
“The technical configuration, however, favors a slide, particularly if the pair remains capped by the aforementioned 0.6500 mark.”
As Australia continues to experience the fallout from a pandemic-altered world, the RBA finds itself under increasing pressure to tackle the nation’s escalating inflation. The bank’s latest Monetary Policy Committee meeting saw it keep the OCR unchanged, as expected. This indicates that it is looking to judge whether inflation will level off or continue to increase. According to analysts, any indication of stubborn inflation will further solidify market expectations. So, for one, they are not expecting the RBA to cut rates anytime soon.
Future Outlook
Judging by inflation projections, prices will continue to be under pressure in coming months. The RBA’s next two meetings will be key to whether they take a hawkish or dovish tack with monetary policy.
One unnamed market source indicated:
“If something, it will confirm what market players already believe: that the RBA will not cut the OCR.”
With inflation projections suggesting continued pressure on prices in the near term, the RBA’s upcoming meetings will be critical in shaping its monetary policy direction.