The Australian dollar has hit a record high of more than US$1.10 as a result of rising interest rate expectations brought on by a higher-than-expected rise in inflation in the June quarter.
The consumer price index, the key measure of inflation, rose by 0.9% in the June quarter, for an annual change of 3.6%, figures from the Australian Bureau of Statistics showed Wednesday. Economists had expected a quarterly rise of 0.8% and an annual pace of 3.5%.
The inflation figures confirmed that rising consumer prices are still an issue for the Australian economy, snubbing out recent speculation that the Reserve Bank of Australia will have to cut interest rates.
Some economists have argued that the central bank should cut interest rates because of weak consumer spending. However, RBA governor Glenn Stevens said Tuesday that consumer spendings were “choosing” to save.
ANZ economist Warren Hogan said the Reserve Bank of Australia would normally respond to such an inflation reading by raising interest rates, however, he said abnormal conditions in the global economy would likely mean the central bank keeps rates on hold at 4.75% when it meets on August 2.”
“If the RBA doesn’t hike next month, the probability of a rate rise before year-end is still high,” he said.
Craig James, chief economist at CommSec, said the more likely scenario would be that the central bank keeps interest rates on hold for a while longer before hiking interest rates in November.
“There is no question that inflationary pressures will remain the hot button issue for the Reserve Bank over the midterm, and the key will be how quickly labour markets tighten up,” Mr James said. However, he said inflation would not become a major problem.
“As long as consumers remain conservative and businesses have to shave margins to move stock then underlying inflation should remain within the Reserve Bank’s target band of 2-3 per cent.”
The news higher rate expectations coupled with US dollar weakness stemming from the stalled US debt-ceiling decision pushed the Aussie dollar up one cent to US$1.1062 immediately following the inflation date. It was the currency’s highest level since the it was floated in 1982.
Meanwhile, the Reserve Bank’s preferred measures of inflation – the trimmed mean and the weighted mean – were also higher. The trimmed mean CPI rose 0.9% in the June quarter, for an annual growth rate of 2.7%, data from the Australian Bureau of Statistics showed on Wednesday. The weighted median CPI rose 0.9% in the June quarter, for an annual rise of 2.7%.
The ABS calculates the trimmed mean and weighted median measures on behalf of the Reserve Bank of Australia (RBA), which uses them to gauge the underlying trend in inflation. Unlike the headline CPI, the RBA’s underlying measures are subject to revision due to the seasonal adjustment of some of their components.
The RBA adjusts the benchmark interest rate to keep the inflation rate in a target band of two to three per cent on average over the medium term. With the annual rates of the trimmed mean and weighted mean CPI nearing the upper level of that band, the market has begun to withdraw expectations of an interest rate cut.
Switzer and AAP
