Inflation rose again: All eyes on what the RBA will do next
Australia's inflation rose to a higher-than-expected 7.8% in the December quarter, on an annual basis.
Markets have been under pressure as central banks across the world have sharply lifted interest rates in their fight against inflation.
Experts are now pencilling in the likelihood of recession for major economies such as the US and Europe amid the steepest monetary tightening by central banks in decades.
Australia's own central bank has been on the front foot in the fight against inflation but was also the first in the world to shift to smaller 0.25 percentage point hikes in October 2022. Will the Reserve Bank of Australia (RBA) have to keep going or are we close to a pause in interest rate hikes?
Inflation hasn't slowed
Data from the Australian Bureau of Statistics (ABS) on Wednesday showed that the consumer price index rose 1.9% in the December quarter.
On an annual basis, that means Australia's inflation rose by 7.8%, marking the highest yearly increase since 1990.
The price rises were largely on account of domestic holiday travel, higher international airfares and increases in housing costs.
Most economists had expected the annual inflation to rise 7.6% while markets had been factoring in an even lower number that would have indicated a slowing down in price rises, and made a case to the central bank for a pause in interest rate hikes.
But the higher-than-expected print in inflation has certainly spooked markets, with stocks on the ASX reversing course and the benchmark S&P/ASX 200 index dropping nearly 0.5% after the release of the data.
Markets are now pricing in a 0.25% rate increase when the RBA board next meets on 7 February. And as the central bank struggles to bring core inflation back to its 2–3% target, many economists are forecasting 2 quarter-point rate hikes this year that will take the benchmark cash rate to 3.6%.
The Reserve Bank's dilemma
The RBA raised its benchmark cash rate 8 consecutive times in 2022, from a record low of 0.1% to a decade high of 3.1% as inflation accelerated. While inflation hasn't slowed yet, the economy is showing signs of struggling.
Whether or not Australia faces a recession as the economy cools in response to higher interest rates will depend on the RBA and how it plans to deal with high inflation, as pointed out by Deloitte Access Economics.
Separate data this week from National Australia Bank's monthly business survey showed that growth has slowed since the middle of last year. There was a sharp slowing in profitability, employment and forward orders for businesses.
Similarly, Judo Bank's composite PMI business conditions survey showed the Australian private sector output contracted for a fourth straight month in January.
"The overall impression from these business surveys is that growth has slowed since mid-last year, but not collapsed," said AMP's chief economist Shane Oliver.
"We remain of the view that the RBA has done enough rate hikes to bring inflation back to target and that it should pause in February to avoid the risk of unnecessarily tipping the economy into recession."
Oliver conceded that the strength of November retail sales and corporate reports suggested a still high risk of another 0.25% hike in February. He believed that either way, the cash rate is at or close to the peak.