Rate cuts likely delayed after latest CPI data

Wednesday’s monthly CPI indicator print shows that Australia still faces a sticky high inflation challenge, according to economists.

The consumer price index (CPI) rose 3.6 per cent in the 12 months to April 2024, according to the latest monthly CPI indicator from the Australian Bureau of Statistics (ABS).

The increase in annual inflation in April is up from 3.5 per cent in March, and above the market expectation of 3.4 per cent.

Commenting on the data, HSBC’s Paul Bloxham said the print showed that Australia still faces a sticky high inflation challenge.

While the chief economist conceded the monthly CPI indicator is volatile, he said it nonetheless suggests that inflation is still “too high” and appears to be sticky at a rate that is persistently above the RBA’s 2–3 per cent target.

“The slow disinflation process in Australia has been evident for some time,” Bloxham said.

“Indeed, the likelihood of sticky inflation had been a key factor in the view we have held since early December 2023 that the cash rate was unlikely to be cut in 2024. Despite the slowdown in growth, the supply side of the economy has been constrained, and productivity has been weak.”

HSBC’s central case, Bloxham said, is that the RBA’s cash rate will be on hold through 2024, with rate cuts not beginning until Q2 2025.

“Today’s print supports our ’higher-for-longer’ view for the RBA. Our view is out-of-consensus, with the consensus among the market economists suggesting a rate cut will arrive in 2024.

“Today’s print also supports our view that there is a higher chance that the cash rate will be increased in H2 2024 than of it being cut.”

While Anneke Thompson believes it is “unlikely” that the RBA will raise the cash rate further, she also thinks the rate will remain at its peak until there are clear signs that services inflation is decreasing.

The chief economist at CreditorWatch stated she doesn’t believe the RBA will be satisfied until early 2025, especially since the impacts of population growth are still being worked through.

“The fight against inflation is still far from over, with the last stubborn categories – housing, fuel, electricity, health, education, and financial and insurance services – proving difficult to get under pricing control,” Thompson said.

“Record-high population growth is likely a contributing factor here, and the hope from here is that moderating incoming overseas migration helps reduce price increases on these essential services.”

The usually optimistic Shane Oliver also predicted that rates will remain higher for longer.

The AMP chief economist took to X to share his thoughts on Wednesday, stating that while the data is “unlikely to bring on a rate hike, it will reinforce higher-for-longer rates”.

Along with Tuesday’s poor retail data, which revealed a weak lift of 0.1 per cent in April, Oliver said the CPI adds evidence “the economy is now very weak”.

Saxo’s head of FX Strategy, Charu Chanana, shared a similar view, noting that the latest CPI print might prompt the RBA to delay rate cuts. However, she too believes it is unlikely to significantly impact stretched consumers.

The RBA is next due to meet on 17 and 18 June.