Inflation increases to 3.8 per cent, making Reserve Bank of Australia interest rate rise likely on February 3

Australia’s Big Four banks are now unanimously tipping a rate hike on Tuesday next week after inflation soared even further above the Reserve Bank’s target band, sparking forecast updates from ANZ and Westpac.

Headline inflation at the end of last year accelerated to 3.8 per cent, up from the 3.4 per cent pace in the year to November 30 and above market forecasts of a 3.6 per cent increase, following the end of the Federal Government’s $75 quarterly electricity rebates.

This annual consumer price index number has been above the RBA’s 2-3 per cent target for five straight months, sparking universal fears interest rates will rise again next week for the first time since November 2023.

Power prices soared by 21.5 per cent last year, with the Commonwealth rebates phased out ahead of the December 31 finish date, and Queensland and Western Australia ending their even more generous schemes in late June.

Holiday accommodation costs went up by 9.6 per cent ahead of housing on 5.5 per cent, driving up services inflation.

“You can see the temporary factors like the unwinding of particularly the State-based energy rebates, you can see more persistent pressures in areas like market services and housing,” Treasurer Jim Chalmers told reporters in Brisbane.

“It reflects a resurgence in the private sector and not an increase in public sector spending.”

Even without volatile items — like power prices, petrol, fruit and vegetables and holiday accommodation costs — underlying inflation was also on the high side. The trimmed mean, the Reserve Bank’s preferred measure of inflation, climbed by 3.3 per cent over the year.

ANZ and Westpac on Wednesday joined the Commonwealth Bank and NAB in forecasting a February 3 rate hike, finally putting all of Australia’s Big Four banks on the same page.

“A cash rate increase next week might not necessarily be followed up with a sequence of moves,” Westpac chief economist Luci Ellis said.

ANZ’s head of Australian economics Adam Boyton noted the underlying inflation figure was well above the Reserve Bank’s November forecast of 3.2 per cent, but suggested inflation would moderate in 2026 and 2027.

“Accordingly, we view this as a single ‘insurance’ tightening, not the start of a series of rate hikes,” he said.

In December alone, headline inflation went up by 1 per cent. Core inflation over three months rose by 0.9 per cent, with this figure already sparking new forecasts of an RBA hike after the summer break.

“The balance of probability now suggests Australia gets a rate rise next week,” independent economist Chris Richardson said.

Overall services inflation is still a major challenge, soaring by 4.1 per cent over the year.

Education expenses went up by 5.4 per cent ahead of recreational services like gym memberships rising by 4.4 per cent.

Goods inflation is also on the high side at 3.4 per cent, with fruit and vegetable prices going up by 4 per cent thanks to a weak supply of apples. Beef prices soared by 10.8 per cent and lamb prices surged by 13.4 per cent, thanks to strong overseas demand for Australian red meat.

A low jobless rate of 4.1 per cent also means businesses are more likely to pass on the costs of higher wages on to consumers, further feeding inflation. Advertised annual salary growth accelerated from 3.4 per cent in July to 3.8 per cent in December, new Seek data released on Wednesday showed.

“With strong labour market data and capacity constraints, the case for tighter monetary policy is clear,” EY chief economist Cherelle Murphy said.

Financial markets are now bracing for a hike sooner than earlier anticipated, VanEck’s head of investments and capital markets Russell Chesler said.

“The market has been predicting two rate hikes this year with the first in May but at this level of inflation, the first rate hike could be sooner - possibly even at next week’s RBA meeting,” he said.

“It is no longer a question of if rates move higher, but when the RBA acts and how many hikes ultimately follow this year.”

Another 25-basis point interest rate rise, taking the cash rate to 3.85 per cent, would add $111 to monthly repayments on an average $694,000 new mortgage and undo the effects of the Reserve Bank’s August rate cut.

Even before the latest inflation data was released, the Australian dollar on Wednesday morning had climbed above 70 US cents for the first time in three years, already priming currency markets for the RBA hike on February 3.

Financial markets were also already expecting a February rate rise, rating it as a 60 per cent chance.

Yields on one-year Australian Government bonds rose only slightly to 4.07 per cent, up from 4.06 per cent.

Share market investors shrugged the strong inflation data off as the benchmark S&P/ASX 200 index traded flat at 8940 points before and after the data. The interest rate-sensitive technology sector traded fell 1.38 per cent in the minutes before the data and had lost only a little ground to be off 1.48 per cent immediately afterwards.

Shares in Australia’s largest home loan lender the Commonwealth Bank also barely reacted to the data, fetching $150.43 before the data and $150.55 in the minutes afterwards.

The Commonwealth Bank isn’t expecting core inflation to fall to the mid-point of the RBA’s 2-3 per cent target until 2027.