The latest Australian inflation data showed that price rises have cooled from the peak of 8.4% annualized inflation for December last year, to a lower rate of 6.8%. This is a stronger drop than had been expected, with most analyst forecasts converging at about 7.2%.
It’s a development that will further fuel hopes that the Reserve Bank of Australia (RBA) will at the very least pause its interest rate-raising cycle.
The next rate decision will be made on 4th April.
The RBA increased the cash rate up to 3.60% this month with a 0.25% rise, which was the tenth consecutive rise in a sequence that began in May last year.
Research group Capital Economics said that the RBA has signaled that there will be a break-off from raising rates in April. Yet it anticipates that the RBA will go back to its recent form by increasing rates again in May by another 0.25% up to 3.85%.
Australian banks are unlikely to experience any valuation losses following the recent instability in the financial system, the group reflected, which prompted the failure of Silicon Valley Bank and Signature Banks.
There is a risk is that a freezing up of overseas bond markets shuts down funding avenues for the major banks.
Yet the RBA can always step in with emergency lending, if necessary, it said.
Central banks have been wary of continuing raising rates as it may place further stress on banking systems.
Federal Reserve Chairman Jerome Powell mentioned last week when its own interest rate rise was announced, that a pause in hiking rates was considered.
Growth in the Australian economy has been relatively sluggish throughout the period of rate rises, but it has not suffered any net contractions in activity.
During the last quarter of 2022, the economy expanded by 0.5%, down from 0.7% and 0.9% in the two previous quarters respectively.
Banks Expected Inflation Decline
Major banks did predict a drop in year-on-year prices in Australia. ING said that the inflation rate would fall below 7% for the year up to February, due to the unwinding of a surge in holiday prices and lower food prices.
The ANZ bank revealed that it anticipated that annualized inflation would be at the 6.8% mark for February.
SocGen believed that there would be a smaller decline in prices over the 12 months to February, with a reduction down to 7%.
Housing and Food Costs Drive Up Prices
The housing sector was the most significant contributor to the rise in annualized prices up to February, reaching 9.9%
Michelle Marquardt, the ABS head of prices statistics, found that despite the rise the annual increase for housing was still higher in January at 10.4%.
New dwellings grew 13% percent in the 12 months to February which is the lowest annual growth since February 2022, as price rises for building materials continued to ease, Marquardt explained.
There was further bad news for renters as prices increased again due to the tight rental market, maintaining the 4.8% annual growth recorded in January.
Prices for food and non-alcoholic beverages eased slightly in the year to February with rise of 8%, in contrast to the 8.2% increase that was found annually in January.
Eating out and takeaway food was the main driver of food costs in February, as it rose by 7.3%.
Dairy and related products increased by a considerable 14.3%, followed by bread and cereal items which increased by 12.5%.
Automotive fuel prices rose 5.6% in the year to February, a drop from January’s annual rise of 7.5%.
Overall annual growth for fuel is the lowest it has been in two years.
In June last year there was a rise of 43.2% in automotive fuel prices over 12 months, highlighting the margin of how fuel prices have dropped.
Treasury Bonds and Australian Dollar Fall
In response to the ABS figures, its Australia 2-year Treasury yield remained stable, reporting a slender 0.003% fall at the close.
The Australian Dollar fell against currency rivals following the CPI announcement, losing ground against both the US Dollar and the UK Pound.
Overall, it is a mixed reaction, with the bond markets seemingly unsure of a further rate rise next week, while the currency markets appear to be more certain that interest rates will rise again.