Australian Q2 inflation may accelerate, increasing pressure on the Reserve Bank of Australia to raise interest rates

According to the Wisdom Financial APP, Australia will release the Consumer Price Index (CPI) for the second quarter on Wednesday. Economists expect the overall CPI to rise by 3.8% year-on-year, higher than the previous quarter's 3.6%. The key core indicator, the average inflation rate that smoothes price fluctuations, is expected to remain at 4%. This is higher than the Reserve Bank of Australia's latest forecast of 3.8%, indicating limited progress in controlling prices.

GSFM's investment strategist Stephen Miller said, "If the inflation rate is around 4% and they do not raise interest rates, this will seriously damage their credibility in fighting inflation." "This may mean that the performance of longer-term bonds in Australia will be poor and will definitely lag behind U.S. bonds."

The Reserve Bank of Australia has raised interest rates less than other central banks globally as it seeks to maintain employment growth while being concerned about the ability of heavily indebted households to cope. Stubborn inflation suggests that the Reserve Bank of Australia may not be able to achieve its target of restoring price growth to 2%-3% by the end of next year, which may require further rate hikes and could potentially push the weak economy into recession.

Australia's inflation progress lags behind other countries and regions

Before the price report was released, Australia's employment growth exceeded expectations, retail sales were strong, and business survey indicators remained resilient. In May, some price indices rose for the third consecutive month, raising doubts about whether policies were "restrictive enough."

The Reserve Bank of Australia has pledged to remain "vigilant" about the risks of rising prices. The interest rate setting committee considered raising rates in June but ultimately decided to keep the rate unchanged at 4.35%. Although the likelihood of a rate hike has decreased compared to earlier this month, the money market still believes that there is a one-fifth chance that the Reserve Bank of Australia will raise rates at the August 5-6 meeting.

Diana Mousina, Deputy Chief Economist at AMP, said, "Australia's inflation rate is still high compared to other countries globally." She believes that a month-on-month CPI increase of over 1% "could lead to a rate hike by the Reserve Bank of Australia" as it would deviate from its inflation target.

Economists expect Australia's CPI to rise by 1% month-on-month in the second quarter.

Australia's cautious policy approach has brought it closer to the end of the global cycle, as the Reserve Bank of Australia discusses rate hikes while some central banks have been easing monetary policy. The Bank of Japan is an exception, with the market predicting a rate hike on Wednesday.

In contrast, the Bank of Canada has been cutting rates continuously, and the European Central Bank has also lowered rates. China, as Australia's largest trading partner, has been reducing borrowing costs.

The Federal Reserve may lay the groundwork for a policy shift in September at this week's meeting. A particularly dovish Federal Reserve may warn the Reserve Bank of Australia against raising rates.

Prashant Newnaha, Senior Interest Rate Strategist at TD Securities in Singapore, said, "With China easing policy and the risk of the Federal Reserve and other developed market central banks easing policy, the Reserve Bank of Australia is very aware that when the trend turns downward, monetary policy needs to be adjusted." Newnaha pointed out that the recent Australian dollar sell-off, stating that "CPI is unlikely to save the Australian dollar's decline."

Due to the decline in commodity prices and concerns about the economy hitting risk sentiment, the Australian dollar has fallen by nearly 2% against the US dollar this month, making it one of the worst-performing major developed market currencies. This is a reversal for the Australian dollar, which had previously shown strong performance due to bets on the Reserve Bank of Australia raising interest rates