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Potential interest rate rise to add to virus woes

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Australian consumers and businesses, already hit by the rapid spread of the Omicron variant of COVID-19, face the risk of an interest rate rise from the Reserve Bank this year after a surprisingly strong set of inflation figures.

The annual consumer price index jumped to 3.5 per cent in the December quarter and above the RBA’s 2-3 per cent inflation target, led by rising costs of new housing and petrol prices.

The Australian Bureau of Statistics said annual underlying inflation – which smoothed out wild price swings and was more aligned to interest rate decisions – rose to 2.6 per cent, up from 2.1 per cent in the September quarter.

ABS head of prices statistics Michelle Marquardt said this was the highest level since 2014, reflecting the broad-based nature of price increases, particularly for goods.

Economists had expected a more modest rise in annual underlying inflation to 2.4 per cent.

It was also stronger than the 2.25 per cent the RBA had been expecting at this stage. It had not predicted it reaching 2.5 per cent until mid-2023.

The inflation report came just days after figures showed the unemployment rate unexpectedly dropping to a 13-year low of 4.2 per cent – again a faster decline than the RBA had expected in its most recent forecasts made in November.

EY chief economist Jo Masters said it looked increasingly likely the RBA would start raising the cash rate from a record low 0.1 per cent late this year, but its actions would be data dependent.

“They will want to be assured of inflation remaining within their target band of 2-3 per cent and an acceleration in wages growth to be under way,” she said.

Financial markets are betting on a move around the middle of the year.

Economists at Barclays expect an end to the central bank’s bond buying program to be called at next Tuesday’s monthly board meeting, the first of 2022.

Business confidence has already taken a massive hit from Omicron and even before having to worry about rising borrowing costs.

The National Australia Bank’s monthly business survey for December showed confidence tumbling by 24 points to an index of minus 12 from plus 12 the previous month.

Business confidence – a guide to future hiring and investment – was down in every state.

“The confidence index fell below the level recorded at the beginning of the Delta outbreak, showing just how concerned business are about the current virus wave,” NAB chief economist Alan Oster said.

While business conditions also fell three points, they remained just above the long-run average at eight index points.

“Overall, the December survey results are consistent with an economy that’s starting to slow,” Mr Oster said.

“That probably means conditions will fall in early 2022. However, we don’t expect the Omicron variant to derail the recovery longer-term.”

Meanwhile, consumer confidence has stabilised after a rocky start to 2022, buoyed by the fall in the unemployment rate, although concerns about the inflation outlook remained elevated.

The weekly ANZ-Roy Morgan consumer confidence index – a pointer to future household spending – rose 2.2 per cent, partly recovering from its 7.6 per cent tumble the previous week, which was the weakest January result since 1992.

ANZ head of Australian economics David Plank said the recovery came in the same week as the jobless rate fall and amid signs that COVID-19 cases appeared to have peaked.

The survey’s consumer inflation expectations rose 0.1 percentage point, returning to a recent seven-year high of 5 per cent.

-AAP

The post Potential interest rate rise to add to virus woes appeared first on The New Daily.

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