Australia’s new annualized CPI was below the 3.8% gain in January and the market estimate, which was also 3.8%.
On a month-to-month basis, CPI came in flat at 0%, well below the January gain of 0.4% and matching the market estimate.
The Reserve Bank of Australia’s preferred core inflation indicator, the trimmed mean, eased slightly to 3.3% year-on-year, down from 3.4% in January, and lower than the market estimate of 3.4%.
The small drop in February inflation report is positive, but the data predates the spike in energy prices due to the Iran war, and the risk of inflation remains tilted to the upside. There’s little doubt that this conflict will push inflation higher for longer, and that could mean higher interest rates. Last week, the Treasury Department projected that inflation could hit 5% if the Mideast conflict becomes prolonged.
RBA – Tightening the Screws
The Reserve Bank of Australia (RBA) has been aggressive and raised interest rates by a quarter-point for a second straight time last week, although the decision was a tight 5-4 vote in favor of the increase. The cash rate is now at 4.10%, its highest rate since April 2025.
For RBA policymakers, the two key factors which will determine the Bank’s rate path are inflation and employment.
The RBA noted at last week’s meeting that there is a substantial risk of inflation staying higher for longer, due to rising fuel prices and increased domestic demand and a tight labor market. The Bank warned that additional hikes may be necessary if inflationary pressures do not ease. With inflation still above the 2-3% target and the war in Iran still raging, it wouldn’t be a shock to see the RBA raise rates again to keep inflation in check.
The labor market remains has been resilient despite the challenging economic landscape. Job growth continues to impress and the economy created 48.9 thousand jobs in February, more than double the January figure and well above expectations. The RBA won’t be able to think about cutting rates while job growth remains strong and the inflation risk is to the upside, and policymakers will be debating between hiking and holding rates.
Australian Dollar Lower, Stock Market Jumps
The AUD/USD currency pair has lost some of its glitter in recent weeks as the Iran war has dampened risk appetite which is often a barometer showing demand for this currency. The Australian dollar is down 0.35% on Wednesday, trading at 0.6973.
The benchmark Australian index, the S&P/ASX 200, had a banner day on Wednesday, rising 154.90 points (1.85%) and closing the day at 8534.30. Investors were in a positive mood on news of a possible cease fire in the Iran war.