Australian inflation was surprisingly strong in the third quarter amid broad-based and stubborn cost pressures, a headache for policymakers that added greatly to the risk of a rise in interest rates as early as next month.
Investors reacted by narrowing the odds on the Reserve Bank of Australia (RBA) restarting the tightening cycle in November after four rate pauses, with futures now pricing in a 66% chance of a quarter-point hike to 4.35%, compared with 35% before the data.
Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 1.2% in the third quarter, above market forecasts of 1.1% and up from a 0.8% increase the previous quarter.
The annual pace of inflation slowed to 5.4%, from 6.0%, but was again above forecasts of 5.3%. For September alone, the CPI rose 5.6% year-on-year, up from 5.2% in August.
Worryingly, a closely watched measure of core inflation, the trimmed mean, rose 1.2% in the third quarter, to top forecasts of 1.1%. The annual pace slowed to 5.2%, from 5.9%.
Two of the four major Australian banks - the Commonwealth Bank of Australia and ANZ - abandoned their rate pause view on Wednesday. Both now see a quarter-point hike in November.
"While 4.35% should mark the peak in the cash rate, there is a risk it could tighten beyond that. Any easing remains a very long way off," said Adam Boyton, head of Australian Economics at ANZ.
Gareth Aird, head of Australian Economics at CBA, expects a rate hike in November would enable the RBA to retain its central case for inflation to return to the target band by late 2025.
