Dollar surges, share market stumbles in warning of potential interest rate hike
The Aussie dollar surged and share market stuttered following the release of inflation figures in a clear sign traders are genuinely entertaining the chance of another interest rate hike.
Wednesday’s data put inflation for the 12 months to July at 3.5 per cent, and the all-important trimmed mean – the RBA’s preferred underlying measure – at 3.6 per cent.
The Australian dollar jumped after inflation figures on Wednesday in a clear sign traders are expecting another interest rate hike. Wayne Taylor/AFR
While the headline figure was a 0.3 per cent slowdown from June and the trimmed mean was steady, both remain well beyond the 2-3 per cent target, and both were higher than market forecasts of 3.2-3.3 and 3.5 per cent respectively.
Markets were quick to react.
The ASX200 had started the day in the green but went into reverse after receiving the inflation print, to be down about 0.2 per cent by 1pm.
The Australian dollar has been enjoying a rally over the last few weeks, boosted by the mining sector’s yearly results, the surging gold price, and weakness in the US dollar.
The added prospect of a further rate hike – if realised, it would be the fourth of the year – added to that momentum, and shortly after 12.30pm, the Aussie was buying 71.84 cents against the greenback, its highest level since late March.
“Rate expectations are only heading one way today,” eToro analyst Josh Gilbert said, adding that a rate hike later this year is “firmly back on the table”.
While economists at Deutsche Bank and KPMG are now pencilling in rates to hit a 15-year high of 4.60 per cent before Christmas, others aren’t as sure, despite RBA governor Michele Bullock’s repeated warnings about another potential hike.
Unemployment rose in July, and while the RBA won’t get another batch of inflation data until the day after its next rates call, the central bank will receive updated GDP figures to judge the state of the economy before its meeting.
“The CPI print alone is unlikely to trigger a policy response at the September meeting,” BNY Asia-Pacific strategist Wee Khoon Chong said.
“We expect the RBA to maintain that policy remains ‘somewhat restrictive’, while reiterating upside inflation risks and its readiness to act if needed.”
However, there is consensus among economists that inflation remains too high, too persistently – and that bodes poorly for borrowers hoping for the RBA to hold fire.
“There is a real risk that inflation remains too high and fails to fall in line with the RBA’s – in our view – optimistic forecasts,” Harry Murphy Cruise from Oxford Economics Australia said.
“With trimmed mean inflation likely to exceed the RBA’s forecast this quarter and showing no further moderation, a September hike is certainly plausible, and our base case remains a November increase,” AMP economists Diana Mousina and My Bui said.
“Money markets are now also pricing in a further full hike this cycle, up from a 70 per cent probability yesterday.”
The RBA will hand down its next interest rates decision on September 29.
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