The Reserve Bank is expected to raise interest rates for the 13th consecutive time at the Melbourne Cup Day board meeting after new data showed a jump in inflation due to rising petrol prices, a tight rental market and rising energy bills.
Overall inflation was 1.2 per cent in the September quarter, compared with 0.8 per cent in June, data released by the Australian Bureau of Statistics showed on Wednesday.
However, headline annual inflation fell to 5.4 percent in September, down from 6 percent in June.
The data was stronger than economists’ expectations for a 1.1 percent increase in the quarterly consumer price index and a 5.3 percent annual increase.
The new figures are likely to be worrying news for new RBA Governor Michele Bullock and will raise expectations that the central bank will increase the cash rate from 4.1 percent to 4.35 percent.
Reserve Bank Governor Michele Bullock is tipped to raise rates after November board meeting
Money markets are now pricing in a 60 percent chance of a rate hike on November 7, up from 40 percent before the new quarterly inflation rate.
At a business conference in Sydney on Tuesday evening, Ms Bullock reiterated that the RBA would raise rates if inflation proved more persistent than expected.
“The board will not hesitate to raise cash rates further if there is a material upward revision to the inflation outlook,” she said.
ANZ head of Australian economics Adam Boyton said the RBA was likely to raise rates by 25 basis points in November due to “uncomfortably high” inflation.
“We had highlighted the risk that the bank could act late this year or early next year, and we now consider it more likely than not that this risk will materialize,” Boyton said.
“While 4.35 percent should mark the peak of cash rates, there is a risk that rates will tighten further. An easing remains a long way off.”
ANZ economists had previously predicted interest rates would remain unchanged in November.
BetaShares chief economist David Bassanese agreed the RBA was likely to raise rates.
For homeowners, Melbourne Cup Day could have little to celebrate as the RBA looks to curb inflation
“Inflation is easing, but perhaps a little too slowly for the RBA’s liking. Inflation in core goods and services is still too persistent,” Bassanese said.
But RBC Capital chief economist Su-Lin Ong said despite the worrying inflation report, there were some “bright spots” that could give the Reserve Bank an “outing” after a November rate hike.
“The tightening of monetary policy so far has started to impact discretionary demand,” Ong said.
In a worrying sign for the RBA, its preferred measure of underlying price pressures – a reduced average inflation rate that excludes volatile items such as food and petrol – rose to 1.2 per cent from 0.9 per cent in June.
The benchmark S&P/ASX200, which was up about 0.4 percent since the opening of trading, fell 0.3 percent lower to 6,839.9 points after the figures were released at 11:30 am.
The surprise result was driven by a 7.2 percent increase in fuel prices in the September quarter – the highest quarterly increase since March 2022.
With Brent oil prices approaching $88 per barrel due to supply restrictions from Saudi Arabia and Russia and the outbreak of war between Israel and Hamas, motorists are paying more than $2 per liter for gasoline.
If the Reserve Bank decides to raise interest rates in November, this will be the thirteenth interest rate increase in a row
A potential escalation of the conflict, pushing Iran or the United States into a corner, threatens to send oil prices even higher, adding even more volatility to global oil markets.
While acknowledging that inflation remained too high, Treasurer Jim Chalmer ruled out a fuel tax cut of 48.8 cents per liter to reduce costs at the gasoline bow.
“We will consider what measures are needed in our economy, in line with our really strict approach to fiscal discipline, but it is not something we are doing,” Dr Chalmers said.
Rents were also a major contributor to price growth, rising 7.6 percent in the year to September – the highest level since 2009, as low vacancy rates pushed up costs.
Rental costs rose by 9.5 percent in Brisbane, 8.6 percent in Sydney and 5.8 percent in Melbourne, with further increases expected due to rapidly increasing migration inflows into Australia.
Price growth was offset by easing price pressures for furniture, household appliances, clothing and footwear, as households reduced discretionary pressure in the face of soaring costs of living.