Australian markets are reassessing the likelihood of an interest rate hike following a surprisingly strong inflation reading of 3.8 per cent in January. According to Marc Jocum, senior product and investment manager at Global X ETFs, these figures indicate that inflationary pressures are proving more persistent than previously anticipated. Global X ETFs offers investors access to a range of international investment opportunities. The firm specialises in thematic and index-based investment products.
Jocum suggests the market may be underestimating the possibility of a rate increase at the Reserve Bank of Australia’s (RBA) upcoming meeting next month. He noted that the trimmed mean, the RBA’s preferred inflation gauge, edged up from 3.3 per cent to 3.4 per cent. This increase, Jocum explains, underscores that inflation pressures are intensifying rather than easing. Core costs remain entrenched across sectors such as housing, food, and recreation.
Jocum believes that without further policy intervention, a swift return to the RBA’s 2-3 per cent target range is becoming increasingly improbable. Market expectations are now pricing in at least one rate hike this year, with the key question revolving around timing. Following the release of the hotter inflation data, expectations for a rate hike in March have risen to approximately 15 per cent, while a 70 per cent probability is now priced in for May.
Jocum added that the hotter-than-expected headline number reinforces that inflation is only half the story. He stated that with a tight labour market and underlying heat persisting, the RBA will closely monitor the situation. All eyes will be on Governor Bullock’s speech, for insights on whether she offers new clues on inflation or maintains a data-dependent approach.
