Prepare for rates hike
Economists warn of more pain as inflation runs hot
Interest rates could go higher still, economists have cautioned, amid stubborn inflationary pressure, rebounding economic growth and tightness in the jobs market.
While most economists still expect the RBA’s next move to be a cut, Judo Bank chief economic adviser Warren Hogan, who correctly predicted Australia’s interest rate path in 2023, tore up his interest rate forecast on Thursday following a string of firmer-than-expected data.
Mr Hogan now predicts the RBA will deliver “at least” two additional rate hikes in August and September, with a further increase in the cash rate on the cards at the central bank’s November meeting.
Previously, he had predicted that the RBA would commence rate cuts in 2025.
Three 25 basis point rate hikes would bring the official cash rate to 5.1 per cent – its highest level since 2008.
If a 75 basis point increase in interest rates was passed on in full, the move would add a further $374 to monthly repayments for an owner-occupier with a $750,000 variable rate mortgage, according to analysis by Compare the Market.
“Two or three rate hikes by the end of the year puts us back on the RBA’s ‘narrow path’ because we’re definitely wandering off it right now,” Mr Hogan said.
“The key thing for the long term stability of the economy and most importantly ensuring that inflation gets down and we get rid of this cost-ofliving crisis, is that we have rates set at the right level for the economy.”
Fresh inflation data, showing consumer price growth accelerated in the first three months of 2024, added to Mr Hogan’s concerns that the economy was running too hot.
“We’re getting some horrendously big price increases for education and insurance and the rental story is a disaster,” he said. “They’re not going to go away if the economy’s doing OK.”
Following Wednesday’s hotter-than-anticipated reading, markets all but erased the odds of a rate cut this year, with interest rate futures ascribing just a 19 per cent chance of easing at the RBA’s December meeting.
Continued resilience in the labour market alongside an improvement in business activity and sentiment had also added to Mr Hogan’s central case that the RBA would recommence tightening.
Given the upside surprise in the CPI figures and ongoing resilience in the labour market, Capital Economics on Friday followed suit, altering its forecasts to also predict a resumption in rate hikes.
“There’s a solid case for the Bank to flip the switch and resume its tightening cycle.” Capital Economics’ Abhijit Surya said.
HSBC chief economist Paul Bloxham said further tightening could not be taken off the table. “There is a risk that they will have to lift their policy rate even further,” he said.