SYDNEY (Oct 28): Australia's inflation accelerated in the third quarter on higher fuel costs, data showed on Wednesday, while stubbornly hot underlying price pressures all but sealed the case for a fifth interest rate rise next week.

Appearing before lawmakers, Reserve Bank of Australia (RBA) governor Michele Bullock warned inflation was far too high and policymakers would need to debate whether four rate hikes this year would be enough to tame inflation at the upcoming meeting.

That was enough to lead markets to price in an 88% probability that the RBA will lift the current 4.6% cash rate by a quarter point next Tuesday, up from 69% before. The Australian dollar gained 0.2% to US$0.7036 and three-year government bond yields rose five basis points to 4.913%.

Economists at the Commonwealth Bank of Australia (CBA) had to give up their call for no rate rise next week after the hot inflation data, although they expect a split decision given the central bank just hiked in September.

"The key question is whether four hikes this year is enough. Recent RBA communications have been hawkish and suggests the answer is no," said Belinda Allen, head of Australian economics at the CBA. "There remains a risk of further rate hikes."

The consumer price index (CPI) rose 1.3% in the third quarter, after an increase of 0.6% the previous quarter, data from the Australian Bureau of Statistics showed. Annual CPI inflation ran at 3.9%, well above the RBA's target range of 2% to 3%.

The key trimmed mean measure of core inflation stood at 1.0% in the quarter, matching forecasts and nudging the annual pace higher to a two-year high of 3.7%.

Inflation data for September also ran hot, with CPI rising 0.8% from the previous month, lifting the annual pace to 4.3%, the highest since March.

Detailed data showed new dwelling prices were flat in September, as some builders increased discounts in response to slowing new demand in the housing sector.

However, both goods and services inflation accelerated in September, up 4.6% and 4.1%, respectively, from a year earlier, suggesting broad-based price pressures in the economy.

Stubborn inflation already forced the RBA to lift interest rates four times this year to a 15-year high and warn it was ready to hike further if needed. That brought its tightening this year to a full percentage point, far ahead of many other developed economies.

Across the Tasman Sea, the Reserve Bank of New Zealand shocked markets by holding interest rates steady at 2.75% after two consecutive rate rises, although it signalled tighter monetary policy is likely needed.

With benchmark Brent crude oil up another 10% this quarter to trade above US$110 a barrel, Australian policymakers worry that could feed into broader price pressures and inflation could risk becoming embedded in expectations after more than five years above target.

"While they are certainly compounding the inflation problem, we still see inflation arising from domestic capacity pressures," Bullock said at the Senate hearing on Wednesday.

She added the labour market still seemed "a little tighter" than previously judged, as evidenced by elevated underlying inflationary pressure. The unemployment rate already climbed to a five-year high of 4.7% in September, well ahead of the RBA's own expectations.

The RBA has a dual mandate of maintaining price stability and full employment, but the policy trade-off has worsened as a run of supply shocks stoked global cost pressures.

Analysts at Citi now expect headline inflation to hit 4.7% in October, from 4.3% in September, as oil prices climb.

"With RBA officials flagging materially higher inflation expectations risks, we see upside risk of a cash rate reaching a 5% handle," they said in a note to clients.

Markets are leaning towards a final rate hike in November, though they still imply around a 40% chance the cash rate could reach 5.1% by early next year. 

Uploaded by Liza Shireen Koshy