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CPI shock reignites rate hike fears for households
The latest data from the Australian Bureau of Statistics shows inflation pressures remain entrenched, with trimmed mean inflation rising to 3.4 per cent in January.
Headline consumer price index (CPI) held at 3.8 per cent, well above the target band of the Reserve Bank of Australia (RBA).
The figures have reinforced expectations that RBA will be forced to lift the cash rate again during the board meeting in May, with the Reserve Bank more likely to rely on quarterly inflation data due at the end of April.
Three of the big four banks, Commonwealth Bank of Australia, Westpac, and National Australia Bank, are now forecasting a 25-basis-point hike at the May board meeting, which would push the cash rate to 4.10 per cent.
Australia and New Zealand Banking Group (ANZ) remains the outlier, predicting the February increase will be sufficient to cool inflation, with the cash rate expected to remain at 3.85 per cent through to the end of 2026.
Banks have already begun moving ahead of the curve, lifting fixed mortgage rates in recent weeks, including at HSBC, St George Bank, and Westpac.
Housing remained the largest contributor to inflation, rising 6.8 per cent over the year, driven by a sharp surge in electricity prices following the end of government rebates.
Electricity costs jumped 32.2 per cent in the 12 months to December, while new dwelling prices rose 3.5 per cent and rents climbed 3.9 per cent.
Inflation remains stubbornly above the RBA’s 2 to 3 per cent target band, raising concerns that price pressures are becoming structurally embedded.
David Koch, economic director at Compare the Market, said the latest data suggested inflation was no longer a short-term aberration.
“It’s concerning that this higher level of inflation seems to be baked in,” Koch said.
“Remember, January is the first month in a quarter, but the way they put the monthly figures now is a bit more reliable than it used to be. It shows that the higher figure for the December quarter wasn’t a one-off or an aberration.”
While a March rate hike is considered unlikely, markets are increasingly confident another increase is coming mid-year.
“Markets are saying it’s highly likely we will get another next rate rise mid-year and this figure would support that,” Koch said.
“Right now, they are betting there is a 70-80 per cent chance that move will happen in May.”
He warned that an earlier move could deliver a significant shock to household confidence.
“I think the Reserve Bank will wait for the next quarter’s inflation figures to come out, to see if the most recent rate increase has had an effect. If they did move in March, it would have a huge psychological effect and come as a big shock to consumers.”
For borrowers, the outlook is becoming increasingly challenging, with higher rates likely to persist for longer than previously expected.
“Right now, the best thing home owners can do is ensure they are on a competitive interest rate. Shop around and see if you can wrangle a rate discount on your own because we could be waiting a long time before we see the cash rate move in the opposite direction,” Koch concluded.