Spiking inflation raises worries of cash-rate rise

With inflation within the RBA's target range, will the central bank be forced to raise rates earlier than expected?

Spiking inflation raises worries of cash-rate rise

Soaring inflation data has spurred fears that the Reserve Bank of Australia will be forced to raise interest rates sooner than expected.

The consumer price index rose 0.8% in the September quarter, according to data released Wednesday by the Australian Bureau of Statistics. The price of goods and services was 3% higher than a year earlier.

These economic indicators could be cause for alarm for Australian homeowners, according to an NCS NewsWire report. Property prices across the country have skyrocketed, driven largely by the record-low cash rate of 0.1%. RBA governor Philip Lowe has repeatedly said that rate will remain unchanged until 2024.

But financial markets have their doubts. AMP Capital chief economist Shane Oliver told NCA NewsWire that the rising index pushed inflation into the RBA’s target range of 2%-3% to raise interest rates. Oliver said the central bank wouldn’t hike rates until inflation was sustained in the target range – but the rising numbers spurred him to predict that rates would lift by the end of next year.

“We’re sort of starting to get there,” Oliver told NCA NewsWire. “They’ve also said that to be confident it’s going to be sustained in the rate, they don’t just want to see a spike into the range and then hike rates. They actually want to see confidence it’s going to be sustained in that range and to get that, they want to see full employment and wages growth of around 3% or more.”

Oliver said that inflation was just one indicator to force a rate rise, pointing out that the central bank would like to see a lower unemployment rate and stronger wage growth.

“Today’s inflation numbers in Australia suggest we might be getting close to the conditions for a rate hike and it may come in a year’s time,” Oliver told NCA NewsWire. “But there’s still a fair way to go yet, and in the interim the RBA would probably do other things to remove the extraordinary stimulus it has provided, such as further tapering off its bond buying.”

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Independent economist Saul Eslake agreed that the RBA would likely want to see inflation in the target range for a sustained period. However, Eslake said the central bank could still be forced to lift rates early.

“They will probably say ‘no’ for the time being, but they might not be able to insist on ‘not until 2024,’” he said.