Persistent inflation in the services industry, rising fuel prices, a rebound in house prices and a robust job market have caused economists to push back expectations of an RBA interest rate cut.
A survey of 42 economists by the Australian Financial Review revealed that the median forecaster now expects the RBA to lower rates in August 2024, as opposed to May 2024, as previously predicted.
"Underlying inflation pressures are still too hot for comfort, and it will likely be a bumpy downtrend,” said Katrina Ell at Moody's Analytics, who anticipates monetary easing by mid-next year.
Goldman Sachs (NYSE:GS) economist Andrew Boak said the bank “expects inflation pressures to trend lower but the strong rebound in oil prices, depreciation in the Australian dollar and resilience of wage-sensitive prices all suggest this will happen somewhat slower than previously.”
Higher before lower
A key development is the indication that interest rates might actually rise before they decrease. Bond traders assign a 62% chance of an RBA rate rise by year's end, but put the likelihood of the RBA increasing the cash rate this week at only 10%.
Meanwhile, Australia's August inflation rate rose to an annual pace of 5.2%, further substantiating the case for higher interest rates. Core inflation — the RBA's preferred measure — remains well above the central bank’s 2% to 3% target at 5.6%.
The economists, however, are split on future rate movements. Michael Blythe of PinPoint Macro Analytics argues that the cycle of rate increases has peaked and projects a cut by May 2024. Yet one in five survey respondents don’t expect a lower cash rate before 2025, citing tightness in the job market.
Given the high core inflation figure Vanguard's Alexis Gray said, “We are not convinced the rate hiking cycle is over and believe the RBA will hike one to two more times as a final nail in the coffin.”
Similarly, Morgans Financial, Macroeconomics Advisory and Deutsche Bank (ETR:DBKGn) each anticipate a peak cash rate in this cycle of 4.6%.
The earliest rate cut prediction amongst survey respondents was from MLC Asset Management’s Bob Cunneen, who sees the RBA cutting rates in February. “The RBA has scope to take their foot off the brake by cutting interest rates early next year,” he said.
MLC notes that the economy is displaying recession conditions with reluctant consumers amid a “painful squeeze” from high inflation and interest rates.
What is clear is that in making monetary policy decisions, the RBA has a host of complex factors influencing Australia's economic landscape to weigh up.