Interest rate rises poised to spike again

HOTTER-than-expected inflation figures have eroded the chance of an interest rate pause next month and likely locked in higher repayments for mortgage holders.

Investors and the big four banks have warned borrowers to brace for a 0.25 per cent increase to the Reserve Bank of Australia’s cash rate when it reconvenes for a monetary policy meeting on Tuesday (February 7).

Inflation rose 7.8 per cent annually in the December quarter – the highest increase to the consumer price index since 1990, according to national statistics bureau data.

The December quarter print outstripped expectations of a 7.6 per cent rise in headline inflation but fell short of the Reserve Bank’s own predictions of an eight per cent annual increase.

RBC Capital Markets’ chief economist Su-Lin Ong said the inflation figures cast some uncertainty over core inflation’s peak and the central bank did not expect such a strong result.

Ong said the hot CPI likely sealed the case for a 25 basis point hike in February and improved the likelihood the same hike in March, leaving the Reserve Bank cash rate at 3.6 per cent.

Commonwealth Bank, National Australia Bank, ANZ and Westpac all agree that the cash rate will likely hit 3.35 per cent next week, and all but Commonwealth – which is yet to forecast beyond February – agree 3.6 per cent will come by March.

Treasurer Jim Chalmers said last week that inflation was unacceptably high, but either at or close to its peak.

“Inflation was the defining challenge in our economy in 2022 and it will be a defining challenge in our economy in 2023,” he told reporters in Canberra

Ms Ong said consumers were clearly still spending generously on leisure and travel, even when accounting for pent-up post-COVID demand and the Christmas rush.

Services inflation also lifted 5.5 per cent annually and has been accelerating on a quarterly basis.

“There may still be more demand ahead and we also continue to highlight the lagged impact on services inflation from higher wages and labour costs,” Ms Ong said.

The festive season also contributed to stronger-than-expected quarterly inflation, with domestic holiday travel and accommodation surging 13.3 per cent and international holidaying up 7.6 per cent.

While the headline figure fell below the RBA’s forecasts, the all-important trimmed mean inflation was well above the central bank’s forecast of 6.5 per cent.

– with AAP