Australia Q3 inflation surprisingly strong, adds to rate hike risk

Australian inflation was surprisingly strong in the third quarter, highlighting stubborn cost pressures that added greatly to the risk of a rise in interest rates as early as next month.

Investors reacted by narrowing the odds on the Reserve Bank of Australia (RBA) resuming rate hikes next month after four months of pauses, with futures now pricing in a 60 per cent chance of a quarter-point hike to 4.35 per cent, compared with 35 per cent before the data.

Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 1.2 per cent in the third quarter, above market forecasts of 1.1 per cent and up from a 0.8 per cent increase the previous quarter.

The annual pace of inflation slowed to 5.4 per cent, from 6.0 per cent, but was again above forecasts of 5.3 per cent. For September alone, the CPI rose 5.6 per cent compared to the same month a year earlier, up from 5.2 per cent in August.

A closely watched measure of core inflation, the trimmed mean, rose 1.2 per cent in the third quarter, to top forecasts of 1.1 per cent. The annual pace slowed to 5.2 per cent, from 5.9 per cent.

The Australian dollar rose 0.5 per cent to a week high of $0.6390 and three-year bond futures tumbled 15 ticks to 95.68, the lowest since 2011. Markets are now seeing rates peaking at 4.43 per cent early next year, up from 4.35 per cent before the data release..

Commentary from the Reserve Bank of Australia has also turned more hawkish in recent weeks. Michele Bullock, the new RBA governor, on Tuesday warned that there were risks inflation would prove more stubborn than expected and interest rates might have to rise further to bring it to heel.

Policymakers have said they have a low tolerance for allowing inflation to return to target at a slower pace than currently expected. The central bank forecast in August that inflation was only projected to return to the top of the bank's target band of 2-3 per cent in late 2025.

The central bank will release its updated economic forecasts in early November.