Major banks tip ‘red hot’ inflation in September quarter

Wednesday’s CPI figures will show a quarterly rise in headline inflation of 1.6 per cent, the Commonwealth Bank (CBA) and ANZ have predicted, pushing the annual rate up to 7 per cent.

According to CBA’s head of Australian economics, Gareth Aird and economist Stephen Wu, inflation pressures are expected to abate “relatively swiftly” from next year.

“But in the near term, the annual rate of inflation will push higher. Indeed the upcoming Q3 22 CPI, due to print on 26 October, is expected to show that inflation pressures remained red hot over the September quarter,” they said.

“This means that monetary policy will be tightened again at the November Board meeting. We consider our forecasts for both headline and underlying inflation to be consistent with the RBA increasing the cash rate by 25 bps at the November Board meeting.”

While economists at both major banks agree on the expected headline inflation figures for the September quarter, the two differ slightly on their views for trimmed mean CPI. 

CBA forecasted a 1.5 per cent quarterly lift in the underlying inflation measure for an annual rise of 5.4 per cent. ANZ has predicted slightly higher increases of 1.6 per cent quarter-on-quarter and 5.6 per cent year-on-year.

The CBA economists stated that high inflation remains the main issue for central banks around the world, including for the RBA locally.

“The RBA is currently an inflation-fighting central bank having delivered an incredible 250 bps of tightening in just five months since May 2022,” said Mr Aird and Mr Wu.

“But the RBA became the first major central bank to reduce the size of rate rises in October when the board increased the cash rate by 25 bps.”

They noted that the RBA had decided to pivot because of the risks to global and domestic growth as well as the potential for inflation to subside quickly.

ANZ senior economist, Catherine Birch, said that the bank’s forecasts were not inconsistent with those of the RBA, which has predicted that the CPI will reach 7.8 per cent with trimmed mean inflation of 7.75 per cent in the fourth quarter of the year.

“An upside surprise would be problematic for the RBA, after it slowed the pace of hiking in October, but a 25 bp cash rate hike in November still seems the most likely outcome in this case,” said Ms Birch.

“It would make a move in December more likely than we currently anticipate though.”

ANZ currently expects that the headline and trimmed mean measures of CPI will peak during the fourth quarter at 7.4 per cent and 5.8 per cent, respectively.

“But the risks look tilted to the upside given continuing cost pass-through, the current flooding, lower AUD and evidence of persistence in inflationary pressures globally, including in the US and New Zealand,” Ms Birch added.

Assistant governor, financial markets for the RBA Christopher Kent stated in a speech on 24 October 2022 that despite Australia's real exchange rate based on unit labour costs "having returned to levels around its pre-mining boom days", the adjustments have run its course. 

"The rise in US interest rates will also contribute to a decline in global inflationary pressures.

"While the exchange rate can play an important role in inflation outcomes, the depreciation of Australia’s nominal trade-weighted exchange rate over the year to date will contribute only a very modest uplift in the level of consumer prices over the period ahead," Mr Kent stated.