**Australian Dollar Rallies After Robust CPI Data Points to RBA Keeping Rates Steady**
*Adapted from Adam Button’s original article on ForexLive, with supplementary analysis and additional data sources.*
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The Australian dollar surged in global markets following the release of much stronger-than-anticipated inflation data, which has dramatically shifted the interest rate outlook for the Reserve Bank of Australia (RBA). The Consumer Price Index (CPI) figures reinforced that inflationary pressures remain persistent within the Australian economy, effectively ruling out any chance of a near-term rate cut as previously speculated by investors and market participants. This article delves into the details behind the data, the immediate market reaction, and the broader implications for Australia’s monetary policy and currency trajectory.
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## Key Points from the Australian CPI Data Release
– The Australian Bureau of Statistics (ABS) reported that the CPI rose by 4.0 percent year-over-year in May, compared to market expectations for a 3.6 percent increase.
– Month-on-month CPI growth came in at 0.5 percent, again exceeding consensus forecasts of 0.3 percent.
– Underlying inflation measures, such as the trimmed mean CPI, also surprised to the upside at 4.4 percent versus the expected 4.0 percent.
– These robust numbers indicate that disinflationary trends have not taken as strong a hold in Australia compared to other advanced economies, notably the US and certain European countries.
– Core inflation, which strips out volatile items, remains well above the RBA’s target range of two to three percent, signaling stubborn price pressures.
## How Markets Responded
– The Australian dollar (AUD) immediately rallied by half a cent against the US dollar after the data release, reflecting the change in interest rate expectations.
– By late afternoon in Sydney, AUD/USD had climbed from 0.6640 to as high as 0.6700. The currency pair also registered sharp gains against other majors and key regional currencies.
– Australian three-year government bond yields soared by more than 20 basis points, as traders rapidly repriced bond markets in anticipation of the RBA’s next moves.
## Analyst Reactions and RBA Outlook
### Major takeaways:
– Several economists, including analysts from Westpac and Commonwealth Bank, indicated that the data effectively rules out the possibility of a rate cut at the RBA’s upcoming policy meetings.
– The central bank’s own Governor, Michele Bullock, has repeatedly stressed that policy decisions will be data dependent, particularly closely monitoring inflation dynamics.
– With inflation proving more persistent, swap markets are now pricing in a greater likelihood of a rate hike in coming months, or at the very least, a prolonged pause at elevated rates deep into 2024.
– Some strategists argue that, if wage growth remains robust and inflation fails to moderate, the RBA may be forced to consider another tightening move.
## Why Australia’s Inflation Remains Elevated
Australia is grappling with sticky inflation for
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