Due to persistently high service cost pressures, Australian consumer price inflation decreased less than anticipated in the 2024 first quarter. This was a disappointing outcome for policymakers and made markets give up on any baseline interest rate cuts this year.
As expected, the Australian dollar increased by 0.6% to USD 0.6522, and three-year bond futures fell to their lowest point of the year, 96.00, by 15 ticks.
The markets shifted to price in nearly all bets on a rate drop in 2024, while pricing in a very small chance, roughly 4%, of a rate hike by August. Reduced from 17 basis points to 3 basis points, the total amount of easing anticipated this year.
According to the latest data released by the Australian Bureau of Statistics, the first quarter’s consumer price index (CPI) increased by 1%, above market expectations of a 0.8% increase.
However, because of base effects, the annual rate of CPI inflation decreased from 4.1% to 3.6%, exceeding expectations that it would ease to 3.5%. The CPI increased from 3.4% in February to 3.5% in March as compared to the same month in 2023.
The trimmed mean, a frequently monitored indicator of core inflation, increased by 1% in the first quarter, surpassing estimates of 0.8% once more. The yearly rate decreased from 4.2% to 4%.
“They’ll be concerned about that 1% figure,” stated Madeline Dunk, an ANZ economist who predicted the first rate decrease in November.
“It’s more than we were anticipating, higher than what the market was expecting, and higher than what the RBA would be expecting,” she stated further.
The Reserve Bank of Australia (RBA) may decide to postpone rate reduction until 2025 if it doesn’t witness a decline in the services and non-tradable numbers in the second quarter. Due to the slower rate of deflation and the continued strength of the labour market, Westpac in April 2024 revised its initial rate cut date from September to November.
With increasing confidence that inflation would moderate and return to its target range of 2-3% by late 2025, the Reserve Bank of Australia has held interest rates at 4.35% for three consecutive sessions.
Nonetheless, given the tight labour market, officials have been cautious in ruling out any policy changes. Since May 2022, the central bank has increased rates by 425 basis points to rein in rogue pricing.
The March 2024 quarter report included several unwelcome milestones, such as college fees rising at the quickest rate since 2012, rent rising at the highest rate in fifteen years, and insurance expenses rising at the highest rate in twenty-three years.
The difference in pricing between tradable and non-tradable is striking; non-tradable prices, which are mostly driven by domestic demand, are still high at 5.0%, while tradable prices have only increased by 0.9% over the past year.
“The intensity of underlying inflation indicates that future disinflation will be excruciatingly slow. The likelihood of an interest rate reduction in 2024 has decreased,” stated Sean Langcake, Oxford Economics Australia’s head of macroeconomic forecasting.
Investors have lowered rate drop forecasts globally as indications that bringing inflation back to target may not be easy in the last stretch. In contrast to about five rate reductions at the start of 2024, markets in the United States are expecting less than two rate cuts from the Federal Reserve by year’s end.