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The odds of a September RBA rate cut have fallen.
The Australian Dollar is outperforming the majority of its major peers after the Monthly CPI Indicator rose 2.8% year-on-year in July, exceeding the market's forecast of 2.7%.
The strength of the data lowered the chances of another cut in interest rates at the Reserve Bank of Australia (RBA) in September, which has helped support domestic bond yields and the currency.
On a monthly basis, prices rose 0.9% driven by electricity, which rose 13.0% m/m and contributed 25bp to the annual figure. Strong rises in holiday travel and accommodation and fuel also drove the strength.
"The drivers were mostly more volatile items," says an analysis from ANZ. "We expect the spike in holiday travel and accommodation prices to fade out of the data quickly."
Although volatile components are evident, analysis from Westpac says there were some worrying developments.
"While it would be easy to attribute this entirely to the sharp rise in electricity prices, dismissing it as a one-off would overlook a potentially important shift in inflation dynamics," says Justin Smirk, Senior Economist at Westpac.
Australia's monthly inflation data series doesn't survey the entire price basket, but it serves as a guide as to where the complete quarterly inflation figure will land.
"Our preliminary review suggests an upside risk to our September quarter CPI estimate of 0.8%qtr (2.7%yr)," says Smirk.
If correct, this places Australian inflation well above the Reserve Bank of Australia's 2.0% target and, importantly, suggests the direction of travel has turned the wrong way. It will raise questions about the wisdom of cutting interest rates any further.
"Based on the July data, we now see upside risk to both estimates. We expect the RBA will take a similar view and, as such, is unlikely to cut rates in September. Instead, the Bank will likely wait for the full September quarter CPI results, due in the last week of October," says Smirk.
Image courtesy of Westpac.
Economists at ANZ Bank expect one final 25bp cut from the RBA in November, suggesting there is less scope of interest rate cuts in Australia than in other developed markets.
"The minutes showed that the path forward will be highly data-dependent, particularly on labour market conditions and the inflation outlook," says Preksha Jain, an analyst at ANZ Bank.
Tighter odds of a rate cut at the RBA has the effect of bolstering short-term bond yields - the interest rate paid on Australia's bonds - which tends to attract inflows of foreign capital.
That in turn boosts the Australian Dollar, particularly against currencies belonging to central banks more inclined to cut.
Also proving supportive in midweek trade is a robust tone to global stock market trade, betraying buoyant investor sentiment that traditionally supports the Aussie.