Bank's economist says a further increase remains more likely than not before year's end
Bendigo Bank has maintained its forecast of an interest rate rise in November, after the Reserve Bank of Australia (RBA) held the cash rate at 4.35% in August but signalled ongoing concern about inflation.
"As universally expected, the RBA kept official rates on hold in August at 4.35% but their comments in the Monetary Policy Statement were sufficiently hawkish to convince us to retain our view that another hike, most likely in November, is still more likely than not," said David Robertson (pictured top), chief economist at Bendigo Bank.
"RBA governor Michele Bullock did acknowledge the outlook remains uncertain, and the obvious downside risks via falling property prices and very low consumer sentiment, but reiterated that inflation is still too high, with risks assessed to be 'skewed to the upside'."
Robertson noted that both the RBA's and Bendigo Bank's forecasts point to a slowdown in economic growth from approximately 2.5% to around 1.25% — a relatively soft landing contingent on energy prices having peaked and gradually moderating.
That assumption carries risk. Oil prices have retreated below US$90 per barrel, but the outlook hinges partly on the progress of US-Iran negotiations and the unimpeded transit of shipping through the Strait of Hormuz — both variables that could complicate the RBA's forecast for core inflation to return to near 2.5% by December 2027.
"We continue to warn that assumptions of RBA rate cuts in 2027 seem very speculative — but admittedly there doesn't appear any urgency for another hike, so we still believe rates will be on hold again in September," Robertson said.
Labour market softens faster than expected
Conditions in the labour market have deteriorated somewhat, with the unemployment rate rising to 4.4% and upward revisions to underemployment figures prompting the RBA to acknowledge that labour conditions had "eased by a little more than expected in recent months."
The central bank now projects unemployment approaching 5% by late next year — a timeline Robertson described as later than Bendigo Bank's own forecasts but increasingly plausible. Shifts in that trajectory will be closely watched for monetary policy implications.
AI boom drives equities as currency volatility rises
Equity markets in Australia and globally continued to reach record levels, driven largely by the expansion phase of artificial intelligence investment. "The sheer volume of investment via US 'hyperscalers' and semiconductor firms is eye watering, but the knock-on impacts on broader industries, businesses and economies will be even more consequential and will probably see ongoing volatility for bond and equity markets," Robertson said.
Currency markets have also seen elevated volatility following coordinated intervention by the Japanese Ministry of Finance and the US Treasury to support the yen, which had traded around 164 to the dollar — its weakest level since 1986. The Australian dollar, by contrast, has held above US70 cents. "As outlined on our business insights website, we still lean to a mildly stronger Australian dollar this year, due to interest rate differentials, outperformance of our major trading partners in Asia, and downside risks to the US Dollar as their debt-to-GDP ratio approaches 125%," Robertson said.
Property prices fall broadly but business investment holds firm
Residential property values have declined more broadly, with most capital cities now recording modest falls. The RBA flagged expectations of a further slowdown in investor credit growth.
Business investment and capital demand, however, remain firm across sectors — factors Robertson indicated are likely to underpin the economic recovery anticipated in the coming year.
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