Australian Interest Rate Rise Back on the Table as Inflation Unexpectedly Climbs

The possibility of an interest rate increase in Australia has resurfaced after data released today revealed a surprising uptick in underlying inflation, dashing hopes of a cut in the near future.

Yesterday, the Australian Bureau of Statistics reported that underlying inflation – the Reserve Bank of Australia’s (RBA) preferred measure – rose for the first time since 2022. This development throws into doubt previous expectations of a rate cut on Melbourne Cup day. Economists had widely anticipated a reduction, but the new figures have shifted the outlook. Rising interest rates would further strain household budgets already impacted by the increased cost of living.

“A rate cut before Christmas did seem reasonable but that’s not on the cards any more,” said Cherelle Murphy, chief economist at EY. While some experts believe inflation will eventually slow, others warn of a potential hike. Johnathan McMenamin, head of economic forecasting at Barrenjoey, stated the “clearest risk” is hotter-than-expected inflation in the December quarter, potentially “lead[ing] the bank to hiking at the February meeting.” He added that the risk of a February hike is now greater than a February cut. For more information on the RBA’s monetary policy, see the Reserve Bank of Australia website.

The news landed with a noticeable impact in Canberra, where parliament is currently sitting, prompting a muted response from Treasurer Jim Chalmers. Shadow Finance Minister James Paterson raised concerns about the potential for stagflation, a damaging combination of high unemployment and inflation, reminiscent of the 1970s. However, economists like John Hawkins, a senior economics lecturer at the University of Canberra, suggest such fears are premature, noting that current unemployment and inflation levels do not yet indicate a stagflationary environment. Australia’s economic growth has slowed in recent years, and this shift could have long-term implications for wage growth and living standards, as explored in ABS data.

Officials are closely monitoring economic indicators, and the RBA will assess the situation in the coming months before making any decisions regarding interest rates.