Inflation in Australia rises further in Q4, more interest rate hikes loom. Reuters

© Reuters. FILE PHOTO: A customer looks at discounted products on display at a pharmacy in a shopping center in Sydney, Australia, July 25, 2018. REUTERS/David Gray

By Wayne Cole

SYDNEY (Reuters) – Australian inflation hit a 33-year high in the last quarter as travel and electricity costs jumped, the result of a shock that contributes to the chance of the country’s central bank raising interest rates again next month.

Investors sharply downgraded the prospect of the Reserve Bank of Australia (RBA) raising its cash rate by a quarter of a point to 3.35% when it meets on February 7, sending the local dollar to a five-month high of $0.7085.

Analysts thought there was a chance the RBA might even pause its tightening campaign, but the pace of inflation itself paid for that.

“While this is expected to be the peak of inflation in this cycle, the RBA’s hawkish communications lead us to expect another rate hike in February, with another hike likely to follow in March,” said Sean Langcake, head of macroeconomic forecasting for the BIS. Oxford Economics.

Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 1.9% in the December quarter, beating market forecasts of 1.6%.

The annual rate rose to 7.8%, up from 7.3%, the highest since 1990 and more than twice as fast as wage growth. For December alone, the CPI rose a whopping 8.4% compared to the same month a year ago, up from 7.3% in November.

The rise in prices was broad-based with a closely watched measure of core inflation, the truncated average, rising 1.7% in the December quarter. The annual pace accelerated to 6.9%, well above forecasts of 6.5%.

Cost pressures also increased in the services sector, which posted its biggest annual increase since 2008, driven by holiday travel, meals and takeaways.

Travel was one of the main cost culprits in the December quarter with prices for domestic holidays up 13% and trips abroad up almost 8%.

“Strong demand, particularly over the Christmas holiday period, contributed to the increase in prices for domestic holiday travel and international airfares,” said Michelle Marquardt, ABS head of price statistics.

“The increase recorded for both domestic and international travel was significantly higher than historical trends in December.”

With inflationary pressures spreading further, markets have priced in the risk of at least two more rate hikes by the RBA with swaps implying a peak above 3.60%.

Three-year bond futures reversed course sharply and were down 3 ticks at 96.910, after rising as high as 97.090 ahead of the CPI data.

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