Reserve Bank faces pressure for rate hike as July inflation data misses expectations

Fears are growing that the Reserve Bank will hit millions of mortgage holders with a fourth rate hike this year, after inflation eased in July but by far less than expected.

Consumer prices climbed by 3.5% through the year, down from 3.8% in the previous month, according to the Australian Bureau of Statistics.

That compared unfavourably to the forecast 3.3% annual rate predicted by economists leading into the result.

The Reserve Bank’s preferred underlying inflation measure, which removes the most volatile prices, had been expected to moderate but instead was stuck at 3.6%.

Brendan Rynne, KPMG’s chief economist, said “today’s data supports the view that without policy action we may be in for a long, costly grind to get inflation under control”.

“The Reserve Bank may have missed an opportunity at the last board meeting to get ahead of the game by raising rates,” Rynne said.

The disappointing update comes a day after minutes from the most recent RBA meeting showed board members were unconvinced that they would be able to hit their 2.5% inflation target by the end of next year and would react to any evidence that price pressures were not easing as expected.

While the decision on 11 August to hold the cash rate at 4.35% was unanimous, a number of board members thought another hike this year was “quite possible”.

Economists, many of whom had ruled out further rate increases, said the latest ABS figures heightened the chance of a November hike, with NAB analysts declaring that their call for no further rate hikes was “under review”.

Phil O’Donaghoe, chief economist at Deutsche Bank, said he now expected the RBA would move as early as the next meeting in September, describing the underlying price growth as “intolerably high”.

“We think the July CPI [consumer price index] leaves little room for the RBA to do anything other than follow through on its hawkish posturing, and the earlier it does, the better,” O’Donaghoe said.

As expected, the end of the fuel excise relief in July helped push up pump prices by 7.5% in the month after falling for three months in a row, the ABS figures showed.

But My Bui, an economist at AMP, said “housing remains Australia’s chronic issue”, as home building costs lifted by 5.7% in the year to July, and rents by 3.6%.

Bui said she still predicted an RBA rate hike in November, but “a September hike is certainly plausible”.

The ABS said that the increase in construction costs “was driven by project home builders raising base prices to pass through higher labour and materials costs over the year”.

The price of takeaway and restaurant meal prices climbed by 4.5% through the year, driven by higher operating costs including ingredients and the increase in the minimum wage from 1 July, the ABS said.