TD SECURITIES: Australian inflation is likely to accelerate, making a rate hike by year-end an even money bet

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Australia’s December quarter consumer price inflation (CPI) report is likely to come out hotter-than-expected says TD Securities, an outcome that could see the prospect of a rate hike from the Reserve Bank Australia by year-end become an even money bet.

Annette Beacher, chief Asia-Pacific macro strategist at TD Securities, explains:

A rebound in core inflation consistent with our expectations (trimmed mean at +0.7%/qtr and +1.9%/yr) provides the biggest headache for the markets and the RBA. We were of the view that the Trump reflation trade didn’t apply to Australia, but have since changed course. The RBA is expected to show patience even if inflation surprises to the upside, but we can see OIS December pricing shifting to 50/50 at least for a rate hike to 1.75%.

Beacher attaches the likelihood of such an outcome at around a 60%, with her forecast for core inflation, also referred to as underlying inflation, above the median economist forecast for a quarterly increase of 0.5% leaving the year-on-year rate at 1.5%.

She puts the odds of a in line outcome at 35%, with the prospect of a undershoot in core CPI — as was the case in the March quarter last year which led the RBA to cut interest rates twice over the following three months — at just 5%.

Australian cash rate futures currently put the odds of a 25 basis point rate hike from the RBA by the end of 2017 at 35%.

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