Economists at odds over RBA’s next move

Given that Australia is the only G10 nation where underlying inflation has increased since December, some economists now view further interest rate hikes as a real possibility. Others, however, are convinced that interest rates have reached their peak and are unlikely to rise again.

Last month, the RBA left the cash rate unchanged at 4.35 per cent for the fifth consecutive time but reiterated that it can’t rule anything “in or out” in light of recent strong jobs and inflation data.

While this messaging, combined with the stronger-than-expected CPI data, inspired markets to rejig their rate expectations to predict an upcoming hike, AMP’s chief economist Shane Oliver and Bendigo’s David Robertson both believe that rates will remain higher for longer but won’t move up again.

“The minutes from the last RBA meeting provided no surprises but reiterated the RBA’s hawkish lean with the implication that it would raise rates again if it judges that inflation would not return to target by 2026 and/or it concludes that demand is not falling enough relative to supply,” Oliver said in recent market commentary.

“Higher-than-expected inflation and retail sales data and the continuation of home price gains since the last RBA meeting two weeks ago therefore add to the risk that the RBA will hike again to further bear down on demand and inflation.”

However, Oliver highlighted AMP’s view that rates have indeed peaked and that the Reserve Bank needs to refrain from “doing too much”.

Oliver cited several reasons for this conviction, with the first being that the lagged impact of past rate hikes is still feeding through the economy, with the RBA itself describing monetary policy as “restrictive”.

Moreover, while retail sales in May were stronger than expected – rising 0.6 per cent month on month – the economist said these figures are likely distorted by EOFY sales.

“The RBA is likely to revise down its growth forecasts heading off any upwards revision of its assessment of demand relative to supply”, Oliver said, adding that AMP also sees evidence that wage growth has peaked.

He further said that a likely slowing US economy will affect global economies, including Australia.

According to Oliver, the monthly inflation data is also likely exaggerating the upside risks for June quarter CPI inflation.

He said: “Headline inflation is set to fall below 3 per cent in the September quarter as a result of energy rebates, which will lower inflation expectations, lower administered price increases and lower wage demands and make for difficult optics for the RBA in trying to explain a rate hike at a time when inflation numbers are set to fall sharply.”

Despite placing the probability of another hike at 45 per cent, Oliver said that AMP’s base case is that rates have peaked, with rate cuts anticipated early next year.

“June quarter CPI data along with June retail sales and jobs data, along with any early readings of how the tax cuts are impacting spending ahead of the August RBA meeting, will be key,” the economist said.

Similarly, Bendigo’s chief economist Robertson believes the RBA cash rate will remain unchanged throughout the year, with rate cuts likely to come in 2025.

“While the May data does increase the probability of another RBA hike in the coming months, our key takeaway from the data was that it further defers RBA cuts, rather than necessarily implying another rate hike,” Robertson said.

“We see relief via RBA rate cuts as a 2025 event, so we’re not surprised that markets (and most economists) are no longer pricing in cuts this year, but the market is now assigning around a 50 per cent probability to another hike which is a long bow to draw on a single monthly CPI read.”

Bendigo has, however, pushed back the first RBA cut from next February to May 2025.

Other economists are beginning to prepare for the exact opposite scenario. Responding to the hotter-than-expected CPI data from last month, Deutsche Bank now expects the RBA to hike rates by 25 bps to 4.6 per cent at its next meeting in August.

Phil O’Donaghoe, Deutsche Bank’s chief economist for Australia, said that underlying inflation in the country is “intolerably high”, noting that Australia is the only G10 nation where underlying inflation has increased since December.

While HSBC’s Paul Bloxham wasn’t as confident in a hike as O’Donaghoe, he said in June that last month’s CPI update “adds to the case for the RBA to consider lifting its cash rate further”.

“We see a 30 per cent chance that the RBA lifts its cash rate by 25 bp in H2 2024,” Bloxham said.

“Our view is that rate cuts are not likely in 2024, a view we have held since late 2023.”