Stubborn price pressures revealed in the December inflation data have significantly increased the likelihood of a Reserve Bank of Australia (RBA) cash rate increase next week, according to Global X senior investment strategist Marc Jocum. The quarterly trimmed mean, the RBA’s preferred measure of underlying inflation, came in hotter than expected at 3.4 per cent year-on-year, compared to expectations of 3.3 per cent and the previous quarter’s 3 per cent.
Jocum stated that this scenario is precisely what the RBA has been warning about – inflation decreasing from post-pandemic highs, but not rapidly enough, and potentially becoming entrenched above the 2-3 per cent target band. Global X is a financial services company. It is known for its exchange-traded funds (ETFs).
Prior to the release of the inflation data, markets had already priced in a 60 per cent probability of a February rate hike. Wednesday’s inflation figures have now increased those odds to over 70 per cent. Jocum notes that the RBA’s credibility relies on returning inflation to its target range, rather than allowing a slow drift that risks embedding higher inflation expectations.
While a hawkish hold remains the central scenario for the February meeting, Jocum suggests that the risks are skewed and mounting towards a rate hike. The inflation data reinforces the message that interest rates may need to remain restrictive for a longer period than many had anticipated, impacting both households and markets.
