Do yesterday's inflation numbers mean interest rates are set to rise?

The conventional wisdom was that rates were heading down… until yesterday.

| More on:
A man leans forward propped on his elbows as he holds his clasped hands to his mouth in a worried pose as he gazes at his computer screen in a home setting.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Yesterday, the S&P/ASX 200 Index (ASX: XJO) and most ASX 200 shares were rocked by the latest inflation figures out of the Australian economy, and consequential fears of another hike in interest rates.

As we covered at the time, these figures showed Australian inflation coming at a hot 3.6% for the 12 months to 30 April 2024, well above expectations of a 3.4% rise.

When excluding volatile items like fuel and travel, the number was even higher at 4.1%. That's well above the Reserve Bank of Australia (RBA)'s official 2-3% target band of where it wants to see inflation.

Thanks to these sobering numbers, ASX shares had a horrid day yesterday, tanking 1.3%. The market consensus over the past few months has arguably been that slowing inflation will eventually result in the RBA lowering interest rates from the current decade-high 4.35% sometime later this year, or perhaps in early 2025.

With inflation coming in hotter than expected, this conventional wisdom could now be in doubt. So it was no real surprise to see the share market react so negatively yesterday.

Remember, ASX shares are directly impacted by interest rates, given higher rates attract money away from the stock market into 'safer' investments like term deposits and government bonds.

Australian mortgage holders have already endured one of the steepest interest rate rises in history over the past two years or so. After all, interest rates were still at a record low of 0.1% as recently as April 2022.

So does yesterday's inflation figures really mean interest rates might actually rise again, rather than fall, as the markets were expecting?

Are interest rates going up following the latest inflation numbers?

Well, unfortunately for anyone with a mortgage or a large loan, one prominent Australian economist thinks that the chances of at least one interest rate hike in 2024 just got stronger.

Speaking to the Australian Financial Review (AFR) this week, Judo Bank economist Warren Hogan reckons the unexpectedly high numbers we've just got a look at could "tip" the RBA's hand when it comes to raising rates. Here's what he said:

These results will test the RBA's patience… Inflation is not falling back to target with signs that inflation's underlying 'pulse' might be picking up in 2024.

The RBA was very close to hiking the rate earlier this month. This number could tip them over to raising rates at their next meeting on 18 June.

As we covered earlier, the cash rate is currently still sitting at 4.35%. But Hogan argues that the RBA might need to set it as high as 5% before it can break the back of inflation.

Hogan stated that 5% would be "in line with other similar economies' interest rates… [Yesterday's] data and ongoing increases in employment suggest this is still the right view".

As with most economic projections, anticipating where inflation or interest rates might head to next is no easy task. Plenty of economists have been wrong on rates before (including the former head of the RBA). However, that probably won't be too reassuring for any mortgage holders today. Let's see what happens.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Economy

a line of job applicants sit on stools against a brick wall in an office environment, various holding laptops , devices and paper, as though waiting to be interviewed for a position.
Share Market News

ASX 200 gives back some heady intraday gains amid Aussie jobs data

ASX 200 investors are running their slide rules over May’s unemployment figures.

Read more »

Woman with a coffee mug in one hand and a tablet in another along with pears on the table, symbolising inflation.
Share Market News

Why the ASX 200 is rocketing on the latest US inflation and Fed interest rate news

ASX 200 investors are celebrating the latest inflation and interest rate news out of the US. But why?

Read more »

Elderly couple look sideways at each other in mild disagreement

Will the US Fed finally cut interest rates this week?

Will the US Fed finally cut interest rates from their 23-year highs this week?

Read more »

A woman crosses her fingers as she flicks a coin into a fountain, hoping for good luck.
Share Market News

European Central Bank cuts interest rates. What does it mean for ASX investors?

ASX investors will be hoping the RBA is paying attention to the ECB.

Read more »

A man looking at his laptop and thinking.

The Bank of Canada just cut interest rates. Will the RBA follow suit?

ASX 200 investors are hoping the RBA will follow the Bank of Canada and cut interest rates. But will it?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Share Market News

How the latest GDP data could bring ASX 200 investors interest rate relief

Australia’s GDP data could flag early rate relief for ASX 200 investors. But why?

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.

What a pay rise for 2.6 million Aussies could mean for ASX shares

A pay rise for 2.6 million Aussies could increase inflation...

Read more »

A man with arms spread yells as he plunges into a swimming pool.
Share Market News

Why did the ASX 200 just plunge on the latest Aussie inflation print?

ASX 200 investors are hitting the sell button following the April CPI data. But why?

Read more »