Australian inflation expected to peak towards the end of the year (official)

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The Australian treasurer warned that inflation in the country is expected to peak towards the end of the year and will persist for a bit longer due to the impact of natural disasters and energy prices.

Jim Chalmers, who will present his first federal budget on Tuesday evening, said on Sunday that inflation was the main influence on the budget, which guides the approach to lowering the cost of living, the Xinhua news agency reported. .

“On the current Treasury forecast, inflation will persist longer than we would like,” he told Australian Broadcasting Corporation television.

The Treasury expects inflation to peak at 7.75% in December.

“It will be a family budget that recognizes that our pressures on the economy come from around the world, but are felt around the kitchen table,” Chalmers said.

Due to inflation, government spending on social security payments, including pension, is expected to be around 33 billion Australian dollars ($20.8 billion) higher than previously forecast.

Earlier this week, the Treasurer confirmed that ongoing flooding in southeastern Australia will hurt the country’s expected economic growth.

Thousands of homes and businesses have been affected by the floods, and the Treasury predicts the floods will drive up the price of fruits and vegetables by 8% over the next six months.

Chalmers said the key elements of the strategy have two parts.

“First of all, how can we get wages moving again in this country, and the budget will be about that,” he said on Sunday.

“But also how can we help inflation come down over time. You do that by making sure that your cost-of-living relief is responsible and that your investments in the economy don’t drive up inflation. .

A new monthly measure of Australian consumer prices recently showed that annual inflation fell slightly in August from July on the back of a sharp drop in petrol prices, raising hopes that cost of living pressures could be close to a peak.

Australia’s central bank recently surprised markets by raising interest rates 25 basis points less than expected, saying they had already risen significantly, although it added that further tightening would still be needed.

Concluding its October policy meeting, the Reserve Bank of Australia (RBA) raised its cash rate to a nine-year high of 2.60%, the sixth hike in as many months that included four outsized moves of 50 basis points. base.

The bank had recently flagged a possible slowdown in the pace of increases at some point. But markets had been betting it would rise half a point this week, in part because of an aggressive rate hike by the Federal Reserve last month.

“The cash rate has been significantly increased in a short time,” RBA Governor Philip Lowe said in a statement.

“Reflecting this, the Board has decided to raise the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia,” he added. “The Board expects to raise interest rates further in the coming period.”

Investors pushed the local dollar down 0.8% to $0.6465, towards its recent 2.5-year low of $0.6364.

Interest rate futures jumped as the market priced in a likely lower peak for rates, below the previously expected 4.0%, while three-year bond futures fell 42, 5 ticks at 96,750.

“It sends a pretty big signal about the pace of future increases…when you’re shifting gears now, when most of the world is still making much larger increases,” said Su-Lin Ong, head of the Australian economy at RBC Capital. Markets.

“The discussion is now going to be zero or 25 for future meetings.” Markets took inspiration from ultra-hawkish central banks abroad, where hikes of 75 or 100 basis points have become almost commonplace. However, Lowe cited the deteriorating outlook for the global economy as a major uncertainty, as well as the reaction of Australian households to significantly higher borrowing costs.

The cautious tone was echoed by Treasurer Jim Chalmers at a press conference following the RBA’s decision. “The weight of opinion around the world is that the global situation has gotten much worse, even in the last few weeks,” he said. Chalmers is finalizing his first annual budget to be released later this month after winning the election in May, and warns it will contain tough spending choices.

The rate hikes already implemented will add around A$800 a month in repayments to the average mortgage of A$620,000, a dead weight for a population that holds A$2 trillion ($1.3 trillion) in home loans. . House prices have also fallen for five consecutive months, led by sharp declines in Sydney and Melbourne. That drop, combined with pension fund losses, shaved A$484 billion off household wealth in the three months to June, and an even bigger drop is likely in the September quarter.

Carol N. Valencia