Tim Hext: Is inflation signalling another rate hike?

Higher inflation numbers could see the Reserve Bank of Australia commit to yet another rate hike by May, according to Pendal head of government bond strategies TIM HEXT.   

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THE Australian Bureau of Statistics (ABS) now has a complete monthly series whereby all items are measured every month (although 10% of the index only changes annually). Previously only 60% of items were updated every month.

The first month in a quarter therefore is now a far better guide to what the quarterly outcome will be.

Inflation numbers showed a monthly rise of 0.4% with prices 3.8% higher than January last year.

The trimmed mean for the month rose by 0.3%, leaving it 3.4% higher than January last year.

“These numbers were 0.1% higher than consensus and are likely to see early predictions for the all-important Q1 CPI trimmed mean (out on April 29^th) to come out at between 0.8 and 0.9%,” explains Hext.

The RBA is predicting 1.8% of CPI growth in the first half of 2026, so these forecasts would be at or slightly below the RBA forecast.

Where does this all leave the RBA? 

“Well, there is not enough here for a March hike, but a May hike looks very likely,” says Hext.  

Markets agree, pricing a 90% chance of a hike.

“Before today we thought the inflation pulse would moderate slightly in Q1 taking pressure off the RBA, meaning a hike was closer to a 50/50 prospect,” notes Hext.

“That view is no longer backed by the data.”

The slight moderating trend of late last year has ended, as seen below:

The monthly data in more detail

The strong

Electricity (+18% on the month)

This is mainly from removal of subsidies. Actual prices ex-subsidy are up 4.5% on the year, still higher than the RBA would like.

Health (+2.7%)

Pharmaceutical products led the way, but medical and hospital services were also strong. Recently announced annual health insurance premium increases of 4% to 5%, starting April, will keep health above 4% annual inflation

Clothing and Footwear (+2.9%)

Not often this category gets a mention as strong, but discounting has reduced from previous years keeping prices unusually elevated.

The weak

Transport ( -0.7%)

Lower fuel prices and public transport fares have helped lower this measure.

Recreation and Culture (-3.4%)

The ABS is still grappling with seasonality across the board, but international travel is proving very hard to quantify and reversed the sharp rises in December.

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The trend

Other areas did not see much change to the recent pulse of higher than target inflation. Rents (0.3%) and New Dwellings (0.4%) will need to show some moderation in the months ahead to make the RBA more confident that inflation is under control.

“We still expect some moderation in inflation through the year but it won’t come soon enough for the RBA,” says Hext.

“Bond markets will struggle to maintain any decent rallies, unless global risk off events spread their wings.

“We still believe bonds up towards 5% represent good medium-term value, but the urgency to buy has eased for now.”

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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