Rate hike odds firm as core inflation figure rises

BORROWERS should brace for interest rate pain as soon as next week after core inflation climbed above the Reserve Bank’s forecasts.

The RBA’s preferred measure of inflation – the quarterly trimmed mean – came in at 0.9 per cent in the three months to December, the Australian Bureau of Statistics reported on Wednesday.

That put growth in the measure, which strips out volatile items and gives a more reliable read on underlying price growth, at 3.3 per cent through 2025, above RBA and consensus forecasts of 3.2 per cent.

In September, the quarterly trimmed mean came in at three per cent.

Given recent labour market and household spending data has also been running hotter than expected the upside surprise on inflation will heighten fears of a rate hike at the central bank’s first meeting of the year next Tuesday.

With inflation well and truly outside of the RBA’s two-to-three per cent target band, the firs rate hike could come sooner than markets had been expecting, head of investments and capital markets at VanEck, Russell Chesler, said.

“With unemployment still low at 4.1 per cent, household spending resilient and property prices continuing to rise, it is no longer a question of if rates move higher, but when the RBA acts and how many hikes ultimately follow this year,” he said.

Ahead of the inflation release, traders were pricing in a 60 per cent chance of a February rate hike, after a drop in the unemployment rate heightened the RBA’s concerns about a lack of spare capacity in the labour market.

Immediately following the release, market-implied odds of a rate hike climbed to over 70 per cent, senior investment strategist at Global X Marc Jocum said.

Mr Jocum believed a hawkish hold remained the most likely scenario for February, “but the risks around that call are clearly skewed and mounting toward a rate hike”.

Headline inflation rose 3.8per cent over the year, up from 3.4 per cent in November.

The rise in the CPI was driven by housing, up 5.5 per cent, followed by food and non-alcoholic beverages, up 3.4 per cent, and recreation and culture, up 4.4 per cent.

Electricity costs rose 21.5 per cent in the 12 months to December, largely due to state electricity rebates in Queensland and WA being used up by households.

Minutes from the RBA’s last rates meeting in December showed board members were still uncertain whether the resurgence in inflation was driven by temporary or more persistent pressures.

Wednesday’s release will heighten concerns that price pressures are more entrenched and will not go away with interest rates at current levels.

“Electricity costs remain elevated, new dwelling construction costs are proving slow to unwind, and higher global tariffs are beginning to flow through supply chains into consumer prices,” Mr Chesler said.

“Services inflation also remains sticky, which historically has been one of the hardest components to bring back under control.”