Stronger than expected inflation figures may mean interest rates will be on their way up soon, economists say.
The annual rate of inflation of 3.6 per cent to June was the fastest pace since late 2008 and higher than economists expected and outside the central bank’s target band.
The consumer price index rose by 0.9 per cent, and the underlying inflation rate, which strips out unusually large movements, increased 0.9 per cent.
The Australian dollar rose to a record high and bond prices fell as investors bet that the Reserve Bank of Australia (RBA) could raise interest rates as early as August.
JP Morgan economist Ben Jarman said the underlying CPI was particularly strong and could prompt the RBA to raise interest rates soon.
“This is a high number and it will probably make them feel a bit uncomfortable,” he said.
“There’s always an outside possibility that they’re forced into hiking interest rates in the near-term.”
The RBA aims to keep headline inflation between two to three per cent over the course of the economic cycle.
The last time the RBA increased the cash rate was in November 2010, raising it to 4.75 per cent, and its next monthly meeting is on Tuesday, August 2.
Mr Jarman expected the central bank to keep the cash rate on hold for a few months, owing to the growing uncertainty in international markets.
Those concerns include sovereign debt problem in Europe and the possibility of debt default by the US government if it doesn’t raise its debt ceiling. RBC fixed income and currency strategist Michael Turner said he was still expecting the RBA to increase the cash rate sometime in the December quarter.
“A bit of that cyclone affect has filtered through to the June quarter even though the price rise was in the first quarter,” he said.
The Australian dollar rose to the highest since the government allowed the currency to trade freely in December 1983 after the release of the higher than expected inflation figures.
The Australian dollar was trading at 109.60 just prior to the data release late in the morning, but quickly rose to a post float high of 110.62 cents.
The currency reached its previous high of 110.11 cents on May 3. Mr Turner said the bond market also reacted strongly to the CPI numbers. Macquarie Group senior economist Brian Redican said the fairly high inflation numbers meant it was a lineball call whether the RBA would raise rates in August.
“The figures were much higher than the RBA had been talking about,” Mr Redican said.
But Mr Redican added that most of the higher inflation came from volatile items such as fuel and fresh food. “In three months time inflation will be looking a lot better,” he said.
Mr Redican said August was the most likely RBA board meeting for a rate rise.
“If they can get through the next meeting, then we’ll have an extended period of stable interest rates.”Read More