Economist predicts rate hikes to resume in August

The cash rate peak of 4.35 per cent has been brought into question following a recent string of unexpected data prints, leading some to believe that the Reserve Bank of Australia (RBA) may opt to raise interest rates once again.

Warren Hogan, Judo Bank’s chief economic adviser, raised eyebrows on Friday (26 April) after the release of the lender’s forecast update.

According to Hogan, the bank’s economic prediction sees the official cash rate now hitting its apex at 5.1 per cent during the second half of 2024. He stated that three rate hikes could be on the horizon, beginning in August, followed by two more in September and November.

Hogan stated that the Australian economy is showing signs of recovery from the consumer-led slowdown of 2023.

“Business activity has consistently improved over the past five months, supporting strong employment growth and investment spending,” he said.

“The pressures on household budgets from a rising tax burden, high inflation and tighter monetary policy are starting to ease. The tax cuts are expected to greatly boost household disposable incomes from 1 July.”

Furthermore, Hogan pointed to last week’s (24 April) quarterly Consumer Price Index (CPI) data released by the Australian Bureau of Statistics (ABS) that yielded a stronger-than-expected result for the March quarter, revealing a rise of 1 per cent, up on the 0.6 per cent rise in December 2023.

“The latest inflation report for the March quarter confirms that domestic inflation is stubbornly high at around 4 per cent to 4.5 per cent,” Hogan stated.

“There is mounting evidence to suggest that the current cash rate of 4.35 per cent is not high enough to restore price stability to the Australian economy.”

Hogan further stated that the economy is straying away from the RBA’s “narrow path” and that further upward adjustment to interest rates could be necessary in the next financial year.

However, while Judo Bank expects the cash rate to increase by 50–100 bps in the second half of 2024, Hogan stated that the RBA will not raise interest rates “unless they absolutely have to”.

“There is still a good chance that the RBA cash rate will not need to rise over the year ahead. While rate cuts this calendar year are looking increasingly unlikely, there is still a scenario that has the RBA cash rate falling towards 3.5 per cent in 2025,” Hogan said.

“Indeed, a further series of rate hikes will likely induce an easing cycle soon after with the cash rate likely to be on a downward trajectory by the end of 2025.”

Hogan was not alone in this assessment of the cash rate. Home Loan Experts chief executive Alan Hemmings recently told The Adviser that he also believes that the next move for the RBA could be to increase interest rates.

Hemmings spoke on the notion of whether or not the RBA will slash interest rates before the US Federal Reserve, stating that he expects neither central banks will move to lower their respective cash rates this year.

Hemmings explained: “In Australia, our inflation rate is not within our 2–3 per cent band, and the tax cuts in July will also put pressure on inflation, as everyone will have more money to spend. In the US, there are signs that inflation is trending up.

“The next move for the RBA and the Fed could, in fact, be an increase.”

He further stated that inflation is still not under control, despite the inflation rate having “dropped dramatically” over the last few months, most recently dropping to 3.6 per cent annually.

“If you look at underlying inflation, there is a marked difference. [Inflation] for goods is definitely down, but for service, which includes items like rent, it’s still sitting above 4 per cent,” Hemmings said.

While the RBA will consider the parts of the economy that are currently under control, overall inflation still remains above the target band, according to Hemmings.

[RELATED: How will the RBA react to March’s CPI data?]

Written by Adrian Suljanovic

Last Updated: 26 April 2024

Published: 29 April 2024