SYDNEY: Australia’s inflation accelerated faster than expected for a third straight month in May, sending the currency higher as traders boosted bets the Reserve Bank of Australia (RBA) will resume raising interest rates at its next meeting.

The monthly consumer price index (CPI) climbed 4% from a year earlier, exceeding economists’ estimate of 3.8%, government data showed.

The trimmed mean core measure, which smooths out volatile items, advanced to 4.4% versus 4.1% a month earlier.

The Australian dollar rose as much as 0.4% as traders priced a greater chance of a rate hike at the RBA’s Aug 5-6 meeting.

Yields on policy sensitive three-year bonds jumped 14 basis points to 4.07%, the biggest one-day gain since April.

Yesterday’s results come after RBA governor Michele Bullock restated last week that the rate-setting board isn’t ruling out a rate hike after leaving the benchmark at a 12-year high of 4.35%.

Earlier yesterday, assistant governor Christopher Kent said the central bank is “alert” to upside risks to inflation and would want to see evidence of a further easing in core consumer prices before considering rate cuts.

Overnight Index Swaps show a cut is not fully priced in until September 2025; indeed, they’re now implying a 40% chance of a hike in August.

In the United States, Federal Reserve officials have said that while they’re encouraged by an improvement in price data, they will need to see months of such progress before reducing rates.

A healthy job market is providing them with some flexibility.

That’s also true in Australia, where the jobless rate is hovering around levels that are below estimated full employment.

The RBA’s goal is to bring consumer prices back within its 2%-3% target while holding onto the significant job gains made since the pandemic.

“The hotter CPI reading will likely add to speculation the RBA will hike rates at its Aug 5-6 meeting. We don’t think it will.

“June’s CPI print and first-quarter 2024 inflation report due July 31 will be of greater relevance - those data will feed into the forecast update ahead of the RBA’s August meeting,” said economist James McIntyre.

The RBA has held rates since a surprise tightening in November, while highlighting that aggregate demand still exceeds the economy’s supply capacity.

Australia’s 13 hikes between May 2022 and November 2023 are at the lower end of the global tightening scale.

Bullock has expressed a willingness to be patient as she seeks to slow inflation without choking off economic growth. The bank’s forecasts show CPI will only return to target in 2025.

 - Bloomberg