Australia’s hotter Q4 core inflation ramps up rate hike bets

SYDNEY, Jan 28 (Reuters) – Australia’s underlying inflation ran at a faster-than-expected pace in the December quarter, adding to a recent slew of hot economic data that has fuelled market expectations of an interest rate hike as soon as next week.

The Australian dollar climbed back above 70 cents. Swaps now imply a 72% probability for a quarter-point rate hike from the Reserve Bank of Australia on February 3, compared with 60% before.

The trimmed mean consumer price index (CPI), a policy-relevant measure of core inflation, rose 0.9% in the fourth quarter from the quarter before, Australian Bureau of Statistics data showed on Wednesday, topping economists’ forecasts of a 0.8% increase.

That lifted the annual pace to 3.4%, the highest in five quarters and well above the RBA’s target band of 2%-3%.

For December alone, the headline CPI rose 1% from the previous month. The annual pace picked up to 3.8% from 3.4% in November and above forecasts of a 3.6% rise.

The RBA cut interest rates three times last year to 3.6%, but inflation has since reared its head again. Policymakers have warned the entire easing cycle may be over, and the next move in rates could be up, rather than down.

Deputy Governor Andrew Hauser said the central bank does not act on one inflation report and would not necessarily hike if the quarterly trimmed mean came in at 1%, but rather it would take a view about the whole economy.
The recent flow of economic data, however, has underscored stronger-than-expected momentum, with a surprise fall in the unemployment rate suggesting the labour market may have started to tighten again.

Robust consumer spending, record-high housing prices and a recovery in business investment are adding to the case that the economy could be already bumping up against its speed limit.