Hot US inflation figures derail hopes of RBA rate cuts this year

Traders have slashed their bets on the timing of rate cuts by the Reserve Bank after fresh data released overnight showed stubborn inflationary pressures in the United States persisted through March, derailing hopes of rate cuts by June from its own central bank.

The hot inflation report will come as sobering news to household borrowers holding out for rate cuts, with analysts forecasting the RBA will hold off for US Federal Reserve to cut interest rates before moving itself.

After CPI rose by 3.5 per cent in the year to March — beating economists’ expectations — bond yields surged, the Aussie dollar dived and the local share market shed one per cent on open.

Responding to the surprise inflation figures, traders pared back the odds of rate relief from the Fed — pushing out cuts to November.

Locally, investors also revised their expectations of rate cuts by the RBA, ascribing a roughly 90 per cent chance of a cut at its final meeting for the year, scheduled for early December.

Only 22 basis points of cuts by the RBA are priced in by the market by year’s end.

Prior to the new figures, markets were fully priced for a 25 basis point cut in November, with a more than one in three chance of a follow up cut at the central bank’s December meeting.

“From the Fed’s perspective, it certainly provided them with no confidence that inflation is moving towards (their target of) two per cent in a sustained way for them to be able to initiate an easing cycle,” Perpetual’s head of investment Matt Sherwood said.

“That is going to be a problem for the Fed because they’ve come out and dismissed the stronger-than-expected inflation data in January and February, only for it to actually be confirmed in March.”

Mr Sherwood added he would be “shocked” should the RBA move to cut rates ahead of the Fed, and was sceptical of any easing at all this year.

“Wages growth is still accelerating, the cash rate is lower to begin with, and let’s not forget the fact that everyone’s getting very, very substantial tax cuts in July,” he added.

Betashares chief economist David Bassanese agreed it was unlikely the RBA would move to ease interest rates before their US counterparts.

“Unless the Australian economy suddenly takes a turn for the worst, the RBA is going to wait for the Fed,” Mr Bassanese said.

“The RBA is looking at the inflation picture in the US as a sort of guide to the risks here as well — the fact that (inflation) has surprised a little bit on the upside will give the RBA pause about what’s going on here.”

However, despite the shock inflation print, not all analysts were convinced time timing of rate cuts locally had been delayed.

“Even if the Feds delayed a bit, there’ll be other major central banks that cut rates … it’s a good signal to (the RBA) that globally, inflation is decelerating and central banks are adjusting even if the Fed waits,” Commonwealth Bank chief economist Stephen Halmarick said.

Commonwealth Bank’s economists expect the RBA will deliver a rate cut at its September meeting.

While Australia, like the US, has seen inflation track sideways in recent months — particularly in the labour-intensive services sector — AMP senior economist Diana Mousina said wages growth was lower and had already peaked.

“I don’t think we will continue to see stickiness and services because I think the unemployment rate is headed higher, whereas the US labour market has still been very strong,” she said.

Even still, the hot US CPI figure was enough for the AMP economist to place her forecasts of rate cut in June “under review”.