MNI BRIEF: RBA Inflation Worries Confirmed In Q3 GDP Data

The Reserve Bank of Australia's call to keep rate hikes on its radar appears justified as inflation indicators contained in Q3 GDP data showed price pressures gathering pace even as growth fell shy of expectations. While Q3 growth came in at a slower than expected 0.6% q/q pace, or 5.9% y/y, the household consumption deflator rose 1.8% q/q - the fastest pace since 1990.

That translated to a year-on-year pace of 7.3%, according to the Australian Bureau of Statistics. The GDP data also showed compensation of employees rose 3.2% in the quarter, the fastest pace since December 2006. Q3 growth remained solid thanks to solid household consumption, though the GDP print reflected only a portion of the cumulative 300bp of the tightening undertaken since May by the RBA, which hiked rates by 25bp to 3.1% on Tuesday. Annualising Q3 growth shows the economy growing at around 2.4%, with the RBA forecasting a slowing to about 1.5% in 2023 and 2024. (See MNI RBA WATCH: RBA Hikes By 25bp, February Increase On Radar)

The decline in the savings rate will not have escaped the RBA's attention. Solid consumption and higher interest rates steered it from 8.3% in Q2 to 6.9%, just above average pre-pandemic levels. RBA Governor Philip Lowe has said monetary policy lags may be longer due to the AUD250 billion in savings accumulated during the pandemic.