Australia's consumer price inflation rate unexpectedly rose to a five-month high in April, driven in part by increases in gasoline, medical, and holiday costs, bolstering expectations that interest rates will not be lowered in the near term.
Data released by the Australian Bureau of Statistics on Wednesday showed that the annual rate of the Consumer Price Index (CPI) in April was 3.6%, higher than March's 3.5% and exceeding the market forecast of 3.4%.
Additionally, the trimmed mean—a closely watched measure of core inflation—accelerated from 4.0% to 4.1%. The annual CPI rate, excluding volatile items and holiday travel, remained at 4.1%.
However, the market response was relatively muted. The Australian dollar rose by only 0.1% to $0.6657, while three-year bond futures fell by 2 basis points to 95.93, after having already dropped sharply earlier in the day due to fluctuations in U.S. Treasuries.
Swaps slightly increased the probability of a 25 basis point rate hike in September from 12% to 20%, while also raising bets that cuts will not occur until August or September next year, which is still 15 months away.
However, economists widely agree that the Reserve Bank of Australia (RBA) will begin cutting rates in the fourth quarter.
"This is not just due to a sharp increase in one or two components, but rather the kind of statistical error caused by seasonal distortions or supply disruptions," said Robert Carnell, Head of Research in the Asia-Pacific region at ING.
Carnell abandoned his prediction for one rate cut this year after seeing the data.
"Our forecast for 2025 remains uncertain. For now, we are maintaining our expectation of a 50 basis point rate cut. But it would be dishonest not to consider the risk that the RBA might tighten policy further."
For policymakers, the April report is somewhat complicated because it is weighted heavily towards goods in the first month of the quarter and does not cover a range of services whose prices tend to be more stable.
High threshold
However, analysts say the threshold for a rate hike remains high.
The RBA has expressed a willingness to avoid "over-tightening" policy even after it recently considered inflation risks slightly elevated, due to an unexpectedly strong first-quarter CPI report.
The RBA expects the overall inflation rate to rise to 3.8% by June this year but hopes that new government relief measures—including billions in electricity and rent subsidies—will help alleviate cost-of-living pressures in the second half of the year.
However, the additional stimulus provided by the government could also boost spending and inflation.
"All of this will ensure that the RBA waits a bit longer; its next move will be a rate cut—but we will have to wait a little longer," said Moody's Analytics economist Harry Murphy Cruise, who predicts a 25 basis point rate cut in December this year.
In April alone, the CPI rose by 0.7% from the previous month, with clothing and footwear prices increasing by 4% and medical costs rising by 2%.
Holiday travel and accommodation prices rose by 4.6%, marking the first monthly increase this year due to higher demand for international travel during Easter and school holidays.
The RBA has raised rates by 425 basis points since May 2022 to a 12-year high of 4.35%, but has refrained from further hikes in four consecutive meetings since last November, as cautious consumers cut spending and economic growth slowed.
However, by not ruling out any policy changes, it has kept the market slightly on edge.
