Australia’s energy woes cause inflationary shock for RBA


An ibis bird perches next to the headquarters of the Reserve Bank of Australia in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz/File Photo

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SYDNEY, June 8 (Reuters) – A recent spike in energy prices in Australia threatens to keep inflation higher for longer, a key reason policymakers felt compelled this week to raise interest rates to their two-decade high and to warn of much more to come.

The surprisingly strong half-point rise in the rate to 0.85% came even as consumer sentiment reached depths last seen at the height of the pandemic and Sydney property prices and Melbourne suffered a third month of losses.

Among the justifications cited by the Reserve Bank of Australia (RBA), rising energy prices meant that inflation was now higher than expected just a month ago.

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“The energy market has been hit by a perfect storm of growing demand, a reduction in coal-fired baseload generation and record coal and gas prices,” said Justin Smirk, senior economist. at Westpac.

This is likely to come as a shock to the RBA given that it has long argued that inflation was less of an issue in resource-rich Australia precisely because energy costs have not risen here.

Australia had lagged behind industrialized peers such as the United States and New Zealand in moving away from the crisis-mode monetary settings of the pandemic and had until recently urged patience in the face of pressures on prices caused by supply bottlenecks. In May, it carried out its first rate hike in more than a decade. Read more

The Labor government, now in just its third week in office, promised to ease the cost of living crisis in an October budget but has no easy fix for the energy spiral. Read more

Australia’s energy market operator last week capped wholesale gas prices in southern states and activated a guarantee mechanism for the first time to call on gas supply, as the Heating demand increased amid a cold spell.

Combined with higher food and fuel costs, Westpac’s Smirk now sees consumer price inflation accelerating to 5.8% a year this quarter, up from a peak of 5.1% in the first quarter. over 20 years.

Even more alarming, Smirk warned that the protracted nature of the problem means inflation could accelerate further to 6.6% in the fourth quarter, well above the RBA’s forecast of 5.9% and the pace the faster since 1990.

There are many signs that companies are already passing on rising costs to customers, ending years of restraint when intense competition was the main concern.

A Melbourne Institute monthly survey released this week showed its measure of underlying inflation jumped 0.7% in May alone, the biggest increase since 2009.

The trimmed average annual increase of 4.0% was the highest since 2008 and well above the RBA’s 2-3% target range.

“This suggests that upstream cost pressures and price pass-through continued or accelerated into the start of the second quarter and we expect another strong reduced average result in July,” said NAB economist Taylor Nugent.

The official CPI report for the second quarter is due on July 27 and the RBA’s preferred trimmed average inflation measure could hit 4.5%. At the same time last year, it was 1.6%.

All of this suggests that the RBA still has a lot to do on rates and is in a rush to get there.

“The RBA board has shifted gears dramatically,” said Gareth Aird, head of Australian economics at the CBA. “The clear intention to bring inflation back to target means that we now expect a further 50 basis point rate hike in July.

It also forecasts quarter-point moves in August, September and November, taking rates to 2.1%.

“However, economic momentum will slow significantly under the weight of such a contractionary backdrop and we have forecast rate cuts for the end of 2023.”

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Reporting by Wayne Cole; Editing by Sam Holmes

Our standards: The Thomson Reuters Trust Principles.


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