By Stella Qiu
SYDNEY, Aug 26 (Reuters) - Australian consumer prices rose more than expected in July as fuel costs jumped, data showed on Wednesday, while core inflation also exceeded forecasts and added to the risk of another hike in interest rates.
That was enough to send the local dollar up 0.3% to $0.7183, hitting a 12-week high, while three-year government bond futures reversed an earlier rally to be last down 4 ticks at 95.41.
Traders are scrambling to reprice the risk of a fourth rate hike from
the Reserve Bank of Australia this year, with a move in September now priced at 38%, up from just 17% before. They are now fully expecting a rate hike by February next year.
After the hot data, ANZ, one of Australia's big four banks that had forecast no change to interest rates from here, is now tipping a quarter-point rate hike in November. National Australia Bank said its RBA call was under review.
"The data suggest there is strong upside risk to the RBA’s near-term inflation forecast... The breadth and nature of the upside inflation surprise in July may also be a concern for the RBA," said Adam Boyton, head of Australian economics at ANZ.
Data from the Australian Bureau of Statistics showed its monthly consumer price index (CPI) rose 1.0% in July from June, exceeding forecasts of a 0.8% rise, as fuel prices jumped 7.5% after falling for three months.
The annual pace slowed to 3.5% from 3.8%, countering expectations for a sharp slowdown to 3.3% due to an outsized increase from last year dropping out of the calculation.
The trimmed mean measure of core inflation increased 0.5% in the month, the biggest increase in a year and well above forecasts for 0.3%, leaving the annual pace at 3.6%.
The RBA held interest rates steady at 4.35% this month for a second consecutive meeting after three rate hikes this year aimed at taming inflation. Policymakers have warned that they would hike again if inflation risks build.
Minutes from the central bank released on Tuesday showed several board members judged it was quite possible the upside inflation risks would materialise, requiring some further tightening. The bank had forecast trimmed mean inflation to slow to 3.3% by the end of the year.
IS SEPTEMBER LIVE?
Analysts noted the surprises came from much higher prices across consumer goods and through market services. Prices for tradeable goods jumped 1.5% in the month, while services inflation picked up by 0.7%.
Wednesday's report showed new dwelling prices jumped 5.7% in July from a year ago, slowing a touch from a 5.8% rise the previous month. Rent inflation held steady at an elevated rate of 3.6%.
Deutsche Bank was quick to call for a hike in September after the data, citing fresh upside risks to inflation, although economists at UBS still think the RBA is more likely to hike in November than in September.
"For the RBA to hike in September 2026, it would signal a deeper concern by the RBA they are ‘behind the curve’ and hence potentially open the door to multiple hikes ahead," said Stephen Wu, an economist at UBS.
Wu added it was more plausible that the RBA could use the September meeting to set up a hike in November.
(Reporting by Stella Qiu and Wayne Cole; Editing by Thomas Derpinghaus and Sam Holmes)
