Christies Beach Surprisingly high inflation means another cash rate cut is highly unlikely.
The consumer price index rose 0.8 per cent in the December quarter, for an annual rate of 2.7 per cent.
Economists had expected a rise of 0.5 per cent for the quarter and 2.5 per cent for the year.
A bounce in fresh vegetable prices was the main reason for the higher than expected inflation.
It means further rate cuts from the Reserve Bank of Australia are off the table, TD Securities head of Asia-Pacific research Annette Beacher said.
“That sound is the door slamming shut for another RBA rate cut,” she said.
“We believe the healthy housing market and nascent construction cycle already obviated the need for another rate cut, while business confidence and non-mining investment growth are highly unlikely to be repaired via a lower cash rate.”
Underlying inflation, which excludes volatile price movements, was 0.9 per cent in the quarter for an annual growth rate of 2.6 per cent, the Australian Bureau of Statistics said.
The RBA has a target range for annual inflation of two to three per cent.
Some economists believe rates could begin to rise before the end of 2014, but National Australia Bank senior economist Spiros Papadopoulos said the RBA would keep the cash rate on hold at 2.5 per cent in the near term.
“It’s a lot stronger than expected and a lot stronger than what the RBA would have been expecting,” he said of the inflation figures.
“Given the other activity indicators at the moment, such as retail sales and also what we’re seeing with house prices, it’s just a further indication that the RBA won’t be planning any interest rate cuts in the near term, given that inflation has overshot even their own forecasts for the December quarter.
“But we’re still expecting business investment will remain weak and unemployment will keep rising so while unemployment keeps rising, I don’t think the RBA will be raising interest rates.”
JP Morgan chief economist Stephen Walters said rate cuts still seemed more likely than rate hikes.
“Much of the upside inflation surprise today came in the narrow space of fresh food prices, a weather-related pop that easily could be reversed in coming quarters,” he said.
“We still believe that the patchy performance of much of the domestic economy and the squeeze on national income from the falling terms of trade, mean that a rate cut later this year is more likely than a hike.
“The most likely outcome from today’s inflation revelation is that RBA officials will sit back and wait to see how much of the bounce in inflation today is reversed in the first-quarter, and how the Australian dollar behaves.”
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