May rate hikes a '50/50 chance'

A JUMP in inflation has wiped out any thoughts of interest rate cuts this year and put the odds of a hike next month at 50/50.

May rate hikes a '50/50 chance'

The latest inflation figures have wiped out any thoughts of interest rate cuts before the end of the year and place the odds of a further interest rate rise next month at "fifty-fifty", economists say.

Australia's trimmed mean consumer price index (CPI) rose 1.2 per cent in the March quarter, for an annual growth rate of 4.1 per cent, the Australian Bureau of Statistics (ABS) said today.

The weighted median CPI rose 1.3 per cent in the March quarter, with an annual rise of 4.4 per cent.

On average basis the measures reflected a 1.25 per cent rise in the quarter, and annual growth of 4.25 per cent.  Market economists had expected the average of the two measures to rise by 0.9 per cent in the March quarter for an annual rate of 3.8 per cent.

The headline CPI rose 1.3 per cent in the March quarter, for an annual rate of 4.2 per cent, beating market expectations of a 4 per cent rise.

ICAP senior economist Matthew Johnson said the Reserve Bank of Australia (RBA) would be “very concerned by the acceleration the core inflation rate”.

“It's obviously far too strong,'' Mr Johnson said today.

“I think it's obviously a fifty-fifty question coming into the May meeting, but I think the slowing global and domestic picture will keep them on the sidelines.”

“But it's no done deal.''

The central bank board next meets to discuss monetary policy on Tuesday, May 6.

Mr Johnson said the RBA would have “no tolerance for any continuation of this sort of inflation trend.”

“Things will have to fall back very smartly to avoid a rate hike in August following the Q2 inflation numbers,'' Mr Johnson said.

“More likely we might see a rate hike, if these inflation figures are sustained, through Q2.

“The window for a rate hike is August.''

Mr Johnson said today's figures extinguished all thoughts of an easing in monetary policy by the end of the year.

“I thought that was always a little bit too ambitious,'' he said.

“It definitely pushes those rate cuts a long way out.''

The Australian dollar leapt on the news, pushing through $US0.9500 for a fresh 24-year high after the data was released at 11.30am (AEST). The unit was trading at $US0.9467 at 1128 AEST but jumped to $US0.9503 by 11.42am AEST.

The central bank left the official cash rate unchanged at 7.25 per cent at its April 1 meeting, but the minutes accompanying the decision predicted a high first quarter inflation result.

The RBA said inflation was “likely to remain relatively high” in the short term and likely to be “around 4 per cent on a year-ended basis in the March quarter”.

The central bank's inflation target is for inflation to remain between 2 and 3 per cent.

ANZ head of research Warren Hogan said the data showed underlying inflation in Australia was “accelerating”.

“Domestic inflation pressures are intensifying'', Mr Hogan said.

This would be of great concern to the RBA but the central bank was likely to hang back for the time being.

“They need to see the economy slow and slow well below trend to be comfortable that inflation is going to come back to the target,'' Mr Hogan said.

“This means the RBA is going to keep a really strong tightening bias.”

He said there would be no relief for mortgage holders in Australia this year, and there could be more pain in the short-term.

“There is still prominent risk of another rate hike after today's numbers.

“There are no rate cuts coming before Christmas with inflation at these levels.”

If the RBA does decide to raise interest rates, it will likely be in August after the second quarter CPI figures are released in late July, he said.

“It will probably more likely happen in August if they were going to move, rather than in May, because they are seeing the economy slow,'' Mr Hogan said.

“But if the economy does not slow and the next CPI, is high, which we suspect it will be unfortunately, they will probably more likely to move in August.''