Mortgage holders may be facing the prospect of higher interest rates following the release of the latest inflation data from the Australian Bureau of Statistics.
Financial markets lifted the probability of a rate hike from 60 per cent to 70 per cent in February.
The Reserve Bank of Australia’s closely watched trimmed mean inflation rate rose 0.9 per cent over the December quarter, taking annual underlying inflation to 3.3 per cent, up from 3.2 per cent previously.
Headline inflation, which includes volatile items, increased to 3.8 per cent over the 12 months to December, compared with 3.4 per cent in the year to November.
ABS head of price statistics Michelle Marquardt said housing was the largest contributor to inflation, rising 5.5 per cent over the year, while food and non-alcoholic beverages increased by 3.4 per cent.
The RBA will assess the data as it continues efforts to return inflation to its target range of 2 to 3 per cent. The central bank meets next Monday and Tuesday, with governor Michele Bullock set to announce the interest rate decision at 2.30pm on Tuesday.
Economists had previously indicated that a trimmed mean inflation increase of 0.8 per cent or less for the quarter would likely avert a rate rise in February.
VanEck head of investment and capital markets Russell Chesler described the inflation outcome as “uncomfortably high”.
“Inflation is not moving decisively in the right direction,” Chesler said.
“With unemployment still low at 4.1 per cent, household spending resilient and property prices continuing to rise, it is no longer a question of if rates move higher, but when the RBA acts and how many hikes ultimately follow this year.”
Following the release of the inflation data, ANZ became the latest of the big four banks to forecast an interest rate increase at the RBA’s upcoming meeting, though it expects the move to be a one-off.
The bank said the inflation figures, combined with stronger-than-expected employment data, pointed to a rate rise next week.
“We now expect the RBA to raise interest rates by 25 basis points on 3 February,” ANZ head of Australian economics Adam Boyton said.
“The return of inflation in components of the housing group (namely new dwelling purchases and rents) is also likely to raise concern at the RBA.”
However, Boyton said ANZ did not expect further tightening beyond February.
“In the wake of an interest rate increase, we would anticipate material softening in leading indicators of activity – such as auction clearance rates, consumer sentiment and business conditions/confidence,” he said.
“Accordingly, we view this as a single ‘insurance’ tightening, not the start of a series of rate hikes.”
Commonwealth Bank and National Australia Bank had already forecast a February rate rise, while Westpac is yet to update its interest rate outlook.
Ahead of the data release, Betashares chief economist David Bassanese said the inflation figures would be pivotal in determining the RBA’s next move.
“My base case remains that the quarterly gain in trimmed mean inflation will be 0.8 per cent, which should be enough to keep the RBA sidelined in February,” he said.
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