Economists pencil in rate hike for May after inflation surges to 5.1pc

The risk of a sharp rise in interest rates challenging the valuations of shares and property continues to build, with Wednesday’s CPI data coming in well above ­expectations.

The risk of a sharp rise in interest rates challenging the valuations of shares and property continues to build, with Wednesday’s ­release of the March quarter CPI data coming in well above ­expectations.

Financial markets economists increasingly expect the Reserve Bank to end the emergency interest rate settings that it adopted during the pandemic when it meets next Tuesday.

AMP, ANZ, Barclays, Citi, JPMorgan, NAB, RBC and UBS economists said the central bank would start off with a 15-basis-point lift in the daily cash rate target to 25 basis points next Tuesday and follow that with a 25-basis-point rise in June and multiple increases over the next 12 months.

The market-implied chance of a 15-basis-point rate increase next week rose to more than 100 per cent, with the market now pricing in a cash rate of 27 basis points for May, according to Westpac.

That increased to 66 basis points for June, implying traders saw a good change of a 50-basis-point increase in the cash rate to 75 basis points. At year-end the cash rate was expected to be 2.5 per cent. A 3.18 per cent rate was expected a year from now, implying mortgage rates of more than 5 per cent.

The dollar jumped from about US71.5c to US71.9c on the news before cooling as the Chinese yuan remained under pressure and the US dollar stayed buoyant amid global growth ­jitters.

Australia’s S&P/ASX 200 share index hit a six-week low but trimmed its fall to 0.8 per cent as US futures tracked a rise in China’s sharemarket, after President Xi Jinping called for “all-out” infrastructure investment as the nation grappled with the prospect of weaker growth amid Covid-19 lockdowns.

Bond yields spiked, with the three-year yield ending up three basis points at 2.68 per cent after hitting a 7½-year high of 2.745 per cent. The benchmark 10-year yield jumped five basis points to 3.06 per cent.

“An agonisingly long quarter has delivered what markets have priced in for some time – a high CPI that brings an RBA rate hike well inside the stated timeline,” CBA head of fixed income and currency strategy, Martin Whetton said.

“Market pricing was largely there, but has moved a little more today reflecting the expectations of a 15-basis-point rise to 0.25 per cent in May and followed up by a lift in June of at least 25 basis points.”

Increased expectations of rate rises came as headline CPI rose 5.1 per cent on-year.

Outside the start of the GST in 2000, it was the fastest pace of ­annual inflation since the mid-1990s.

Trimmed-mean CPI rose to 3.7 per cent, the highest since early 2009, with this underlying measure of inflation exceeding the RBA’s 2-3 per cent target band for the first time since early 2010.

The underlying CPI spent more than five years below the target band, during which the RBA cut the cash rate from 2 per cent to 10 basis points, with the Covid pandemic leading the RBA to slash the rate from 75 basis points and introduce a quantitative easing and yield curve control programs.

Scott Morrison blamed supply chain issues, petrol prices and pandemic impacts.

But ANZ’s head of Australian economics, David Plank, said the strength of “non-tradeable

inflation” – now running at more than 4 per cent a year, signalled that the CPI blowout was “partly due to the momentum on wages, and not just disruptions in the global economy”.

“Inflation pressures have ­momentum and have broadened,” Mr Plank said. “A cash rate target of 0.1 per cent is inappropriate against this backdrop.”

The minutes of the RBA’s April board meeting highlighted the central bank’s desire to be “consistent with its announced framework” and wait for data on “the evolution of labour costs” before it moves.

The RBA could decide to wait for the release of the Wage Cost Index on May 18 before delivering a bigger rate rise of 40 basis points, a view favoured by Westpac chief economist Bill Evans.

But Mr Plank said the bank should not wait for more data on wages, given that its own liaison program indicated that “wages growth had continued to pick up in the March quarter”.

“Regardless of whether the RBA’s first move is in May or June, we expect the cash rate target to be at 0.5 per cent by early June,” he said.

“The CPI data likely brings forward the time the cash rate target reaches 2 per cent, possibly to the first half of 2023.

“We still look for an eventual move above 3 per cent.”

Similarly, JPMorgan Australia chief economist Ben Jarman said: “There is enough uplift on core inflation to force the RBA to move further ahead of wage data.”

RBA minutes last week reiterated the framework that the board wanted “evidence” that the target was sustainably achieved, which required “faster wages growth than had been expected over previous years”.

“Still, while clearly shy of the RBA’s previously stated 3 per cent threshold, an increase to above pre-pandemic wage growth has looked a near certainty for the first quarter data, given how the quarterlies are rolling out,” Mr Jarman said. He argued that the “constraint of the election timing – seemingly a catalyst for the RBA to previously commit itself to observing a little more data to push action into June – shouldn’t be as significant as it proved in 2019.” The RBA last lifted rates during an election cycle in ­November 2007.

Mr Jarman said economic and policy uncertainty was significantly lower than it was just before the 2019 election, given the vastly differing platforms of the major parties at that time.

AMP chief economist Shane Oliver said that, while temporary factors had boosted inflation, the cumulative impact from supply issues was “leading to uncomfortably high consumer prices”.

“Impacts from higher commodity prices and global supply issues could still persist for the remainder of the year, which means that we haven’t reached the peak in annual inflation and the breadth of price rises across CPI baskets has also increased.”

In the March quarter, 56 per cent of CPI categories had a price rise of more than 3 per cent over the quarter, compared to just 35 per cent last quarter and 79 per cent in the US.

Originally published as Economists pencil in rate hike for May after inflation surges to 5.1pc