RBA governor Michele Bullock may need to lift interest rates if inflation comes in hotter than 3.2 per cent.
The Australian dollar has rocketed to its highest level since February 2023, as the US dollar continues to deflate amid chaotic global financial movement.
The local currency jumped again to 70.1 US cents, straight after the release of the latest inflation figure late on Wednesday morning.
The ABS said the quarterly inflation rate for the three months until December came in at 0.9 per cent, above market expectations of 0.8 per cent.
The headline figure is now 4.8 per cent, up from 3.4 per cent.
The rise comes as frustrated mortgage holders in Australia are being warned of a “make or break” moment in the latest inflation figures, which the Australian Bureau of Statistics will release at 11.30am AEDT.
On Wednesday morning, the Australian dollar surged to 70.1 US cents, a 1.4 per cent jump.
The US dollar has lost a whopping 8 per cent of its value – a four-year-low – over concerns about tariffs.
The Australian dollar jumped on Wednesdays announcement
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The currency’s collapse has occurred while precious metals such as gold (52 per cent), silver (96 per cent) and copper (36 per cent) have all surged.
Overnight, gold surged above $US5100 ($A7280) an ounce for the first time.
The sell-off was accelerated overnight, sparked by talk of a joint intervention between US and Japanese authorities to support the yen.
Global stock markets mostly rose on Tuesday as investors geared up for the US Federal Reserve’s policy meeting outcome and earnings from tech titans, which will be pored over for signs of AI momentum.
In New York, the Dow blue-chip index ran into some profit-taking, but the broader S&P index and the tech-heavy Nasdaq Composite rose.
The Aussie dollar has rocketed overnight. Picture: NewsWire / Nicholas Eagar
Earlier on Tuesday, Asian stocks brushed off South Korea-US tariff concerns, instead focusing on “hopes of strong earnings from the US tech heavyweights in the next couple of days”, Interactive Investor head of markets Richard Hunter said.
Here in Australia, the ASX200 is set to rise by 0.5 per cent on opening.
Tech firms are enjoying a fresh boost ahead of earnings releases as traders continue to pile into all things artificial intelligence.
Apple, Meta, Microsoft and Tesla give updates this week, with other bellwethers including Texas Instruments, Boeing and Mastercard providing an idea about the state of the US economy.
Boeing shares rose 1.8 per cent after the aircraft maker reported its first annual profit since 2018.
Concerns remain meanwhile over the scale of investment in AI even as its deployment has yet to pay off significantly.
Investor attention was also on the Federal Reserve’s policy meeting starting on Tuesday.
The US central bank is widely expected to hold key interest rates steady on Wednesday, but “markets will be watching keenly to see if Chair (Jerome) Powell, who’s kept a tight grip on monetary policy, is to be replaced by a Trump dove”, Hargreaves Lansdown head of equity research Derren Nathan said.
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Data released on Tuesday showed consumer confidence in the US plunged in January to its lowest level since 2014 as American households continue to fret about inflation and elevated costs of living.
eToro market analyst Lale Akoner said that weaker sentiment gives the Fed more room to wait before acting, as it indicates a gradual slowdown in growth than a downturn.
“If inflation continues to cool and growth softens gradually, rate cuts later in the year or into 2027 become more likely,” she said.
Markets expect the Fed to cut interest rates next in June or July. US President Donald Trump has meanwhile reverted back to tariff threats this week, warning South Korea he would impose 25 per cent tolls on goods including autos for falling short of expectations on an earlier pact struck with Washington.
Nightmare scenario for homeowners
This all comes as frustrated mortgage holders are being warned of a “make or break” figure to be released on Wednesday that will decide if interest rates need to rise.
Ahead of the Reserve Bank of Australia’s first meeting of the year next week, the Australian Bureau of Statistics will release the December quarterly consumer price index at 11.30am.
The RBA will be watching the data closely as it continues its battle to keep Australia’s inflation rate between 2 and 3 per cent. In November, inflation was at 3.4 per cent.
Judo Bank chief economist Warren Hogan says if Wednesday’s quarterly inflation rate is at or higher than 0.8 per cent, the RBA will need to announce an interest rate hike next Tuesday, February 4.
“Interest rates are not high enough to get inflation down to target and restore price stability to the Australian economy,” he told Sky News on Tuesday.
Mr Hogan warned there could be multiple interest rate hikes given for the first time in years consumer spending was on the rise, meaning businesses can pass on rising costs.
“It was that weak consumer (spending) that kept inflation coming down, but with the consumer coming back that really opens the door for businesses to pass on those costs and inflation continuing to rise,” he said.
“The Reserve Bank aren’t going to be able to just do one or two, they are going to have to fully reverse the (three) rate cuts from last year and that is our best hope for minimising how many rate hikes there are.”
RBA governor Michele Bullock will announce the central bank’s rate decision next Tuesday. Picture: NewsWire / Christian Gilles
Oxford Economics Australia head of economic research and global trade Harry Murphy Cruise had a similar prediction for cash-strapped mortgage holders.
“What data lands at the end of the month, with 3.2 per cent being the magic number for trimmed mean inflation,” he said.
“Anything above that will warrant a hike when the RBA board next meets.
“Anything at or below should be enough for the board to hold rates steady.”
Betashares chief economist David Bassanese agreed, saying the quarterly inflation figure would either “make or break” the case for a rate hike next week.
“My base case remains that the quarterly gain in trimmed mean inflation will be 0.8 per cent, which should be enough to keep the RBA sidelined in February (given this result at least implies a deceleration in underlying inflation from the 1 per cent previous quarterly gain).”
The ABS recently shifted to including the full monthly inflation print in its monthly data but confirmed it would continue to produce quarterly figures that the RBA would to use.
In November, Australia’s headline annual inflation rate dropped to 3.4 per cent from 3.8 per cent in the 12 months.
The all important trimmed mean inflation rate – which the RBA uses as it removes volatile and outlier price changes – fell to 3.2 per cent from 3.3 per cent over the last year.
Also weighing against mortgage holders getting a break is a surprising drop in the unemployment rate.
Australia’s unemployment rate fell to 4.1 per cent in December from 4.3 per cent in November as 65,000 new workers found a job in the final month of last year.
This was largely driven by younger Australians entering the workforce full-time.
This is a worrying sign for the RBA as too many Australians working could increase spending, leading to a higher inflation rate.
The RBA has a dual mandate of full-employment and stable inflation.