Economist warns of a cautious path to the inflation target range
It’s bad news for those expecting a rate cut from the Reserve Bank of Australia (RBA) soon.
In its latest economic update, Bendigo Bank said that expectations for an early rate reduction must be tempered.
“The first RBA meeting for 2024 went to script with no change to interest rates, as forecast, and the messaging matched our expectations of no further rate hikes, but there will be a need for patience before the RBA can be expected to cut rates,” said David Robertson (pictured), chief economist at Bendigo Bank.
“Governor Michele Bullock spoke candidly about the need to remain vigilant on inflation. This should be interpreted mainly as a warning that rate cuts will be after inflation is tamed, not just on the hope that it might be.
“Having said that, there’s no doubt recent inflation data has been encouraging. Core inflation fell to 4.2% by year end. There has also been pleasing progress on goods price inflation.”
Despite the positive signs, Robertson warned of a cautious path to the inflation target range, highlighting challenges such as high services inflation due to tight labour markets, potential supply chain disruptions from geopolitical tensions, and the inflationary impact of stage three tax cuts.
The economist predicted a realistic timeline for rate cuts to begin in early 2025, contrary to market expectations for reductions as early as September this year. He also noted the unpredictability in forecasts caused by higher-than-expected net migration and its effects on labour markets and property prices.
With unemployment remaining low, Robertson suggested a “soft landing” is possible, echoing sentiments in the US, where financial markets anticipate similar outcomes.
“The next RBA decision isn’t until March 19 when rates will again be on hold, but, ahead of that, the key data points will be labour force numbers for January and the monthly CPI indicator out later this month,” he said. “Market consensus is for benign inflation, a soft landing with low unemployment and rate cuts by September, but this narrow path will need a lot to go right to deliver cuts so soon.”
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