For some context, the October reading was the first complete monthly CPI published by the ABS. So, this is just the second one and is yet to iron out seasonal kinks. As such, the RBA again won’t place too much emphasis on this and will wait on the full December quarter report – which will only be out on 28 January.
In any case, let’s take a look at the numbers and what do they mean for the RBA and the Australian dollar currency.
Headline annual inflation showed some easing from 3.8% in October to 3.4% in November. However, that will do little to reassure the RBA of falling price pressures as the trimmed mean reading only showed a marginal drop from 3.3% in October to 3.2% in November. As a reminder, the trimmed mean reading is what the RBA focuses on as it is their handle of core inflation so to speak. On a monthly basis, the trimmed mean reading showed a 0.3% increase month-on-month.
Of note, new dwelling prices (+2.8%) and rents (+4.0%) continue to hold higher with services inflation also remaining as a sticking point. Even food price inflation isn’t showing much easing, seen at 3.3% and keeping thereabouts since June.
So, what does this mean for the RBA?
The data today doesn’t shift the direction all too much. As things stand, the RBA is watchful and has to consider when they must take action if inflation actually proves too sticky and in need of policy intervention/action.
That’s basically the key trigger question right now, with the trimmed mean reading continuing to keep above the supposed target threshold band of 2% to 3%.
As things stand, market players are pricing in ~35% odds of a rate hike at the next RBA policy meeting on 3 February. As for analyst calls, they are more divided. Looking at Australia’s big four, CBA and NAB both have penciled in a rate hike for February while Westpac and ANZ forecast that the RBA will keep rates on hold for a longer period. However, Westpac does note that there are risks on both sides of the equation.
So far, the RBA hasn’t made it obvious as to when they might choose to act. However, they have made it clear that they are starting to come around to the view and narrative that Australia has a renewed inflation problem.
At most, they might get away with leaving February on hold and then putting out a more convincing storyboard in hiking rates later this year. But as things stand, the risk seems to be that the central bank might have to sooner rather than later.
What now for the Australian dollar?
With ~35% odds priced in for a 3 February rate hike, the next key risk event to watch will be on 28 January when we get the December quarter data. That will be key in judging if inflation is really too sticky and the RBA might just have to do something about it. But with just ~42 bps of rate hikes priced in so far this year, there is scope to the upside in pricing in a more hawkish RBA if need be based on inflation developments.
As for the short-term technical picture, AUD/USD remains largely bullish with the pair trading to its highest since October 2024. There was a bit of a setback on the data release earlier but the near-term outlook hasn’t changed with price action keeping well above the key hourly moving averages. That hints at a more bullish near-term bias for now.
There will be some resistance and offers layered closer to 0.6800, so that could offer some room for consolidation
