Stronger inflation has locked in February RBA hike expectations, supporting the AUD but leaving risks of further tightening alive.
Summary:
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MUFG and CBA both say persistent inflation and tight labour conditions have strengthened the case for a February RBA rate hike.
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Australia’s latest CPI showed headline inflation rising to 3.8% y/y, while trimmed mean inflation lifted to 3.4%, reinforcing concerns about sticky price pressures.
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Rate markets have moved to fully price a 25bp hike in February, supporting recent AUD outperformance.
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MUFG says rising commodity prices, firmer global growth and RBA expectations are underpinning the Australian dollar.
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CBA expects a single 25bp hike, but warns a second increase remains a risk if labour market tightness persists.
Expectations for a near-term rate hike from the Reserve Bank of Australia have firmed following stronger-than-expected inflation data, with both MUFG and Commonwealth Bank of Australia pointing to persistent price pressures and a tight labour market as key drivers.
MUFG said the Australian dollar’s recent outperformance has been supported by growing optimism around global growth, rising commodity prices and increasing confidence that the RBA will lift rates early this year. Those expectations were reinforced by the latest CPI report, which showed inflation moving further away from the central bank’s target range.
Headline CPI unexpectedly rose to 3.8% in December, while the trimmed mean measure of core inflation increased 0.9% quarter-on-quarter in Q4, lifting the annual rate to 3.4%. MUFG said the combination of elevated inflation and evidence of tightening labour market conditions will heighten the RBA’s concern about persistent inflation risks. As a result, Australian rate markets have moved to more fully price a 25bp hike at the February meeting.
CBA shares that view, saying the inflation data reinforce its expectation that the RBA will raise the cash rate by 25 basis points in February. The bank continues to argue that the economy requires only limited policy fine-tuning, with a single rate increase likely to be sufficient to steer inflation back toward target by the end of the forecast horizon.
However, CBA cautioned that risks remain skewed toward further tightening. While underlying inflation is no longer accelerating, it remains too high, and early signs of renewed labour market tightness alongside ongoing support from consumer demand could force the RBA to consider a second hike later this year.
For markets, the alignment of rising rate expectations, resilient growth signals and supportive commodity dynamics has helped underpin the Australian dollar. MUFG said a clearer path toward RBA tightening has been an important factor behind AUD strength, with the currency likely to remain sensitive to incoming inflation and labour data.
This article was written by Eamonn Sheridan at investinglive.com.