The Reserve Bank of Australia (RBA) is expected to follow up November’s interest rate increase with another hike in February next year, according to economists at NAB.
The big four bank’s economists, led by group chief economist Alan Oster, believe that the RBA’s revised outlook will be enough to warrant further monetary policy tightening.
The RBA now expects that inflation will fall to around 3.5 per cent by the end of 2024 (up from 3.3 per cent) and be “at the top of the 2 to 3 per cent target range” by the end of 2025.
RBA governor Michele Bullock has conceded that inflation is “proving more persistent than expected” and said information received since the RBA’s meeting in August suggested that “the risk of inflation remaining higher for longer has increased”.
Along with slower progress towards its inflation target, the RBA now also anticipates that unemployment will peak at around 4.25 per cent (down from 4.5 per cent). The central bank’s full forecasts will be released in its next statement on monetary policy on Friday.
“The resilience in recent activity data suggests the economy is weathering the period of elevated inflation and the adjustment to higher rates better than had been expected,” NAB’s economists said.
“While households are under pressure, incomes have been supported by employment and wage growth, savings rates have adjusted, and stronger-than-expected population growth has supported aggregate demand.”
NAB’s economists acknowledged that November’s post-meeting statement somewhat softened the hiking bias of previous statements, with the RBA noting that “whether” any further hikes are needed “will depend upon the data and the evolving assessment of risks”.
“In our view however, the revisions to the outlook mean a single 25 bp adjustment is unlikely to be seen as enough to offset the upside risks,” the NAB economists said.
“As such, we pencil in a further hike to a 4.6 per cent peak – most likely in February, when the board will have the benefit of the full Q4 CPI to assess the evolution of inflation pressures (though December is a live possibility).”
According to NAB, a more limited deterioration in the labour market than anticipated will put less pressure on the RBA to begin easing monetary policy. Subsequently, NAB has pushed back its forecasts for the first rate cut next year from August to November.
“On balance, we see a 4.6 per cent peak as sufficiently restrictive to offset domestic inflation pressures while remaining below the levels of rates seen elsewhere, in line with the board’s stated preference to tolerate a slower path of disinflation in order to try to maintain post-pandemic employment gains,” NAB’s economists said.
“Still, the flow of data will remain critical as the board assesses the trajectory of inflation in a highly dynamic and uncertain environment.”
The other big four banks have not pencilled in another rate hike at this stage, but both Commonwealth Bank and Westpac have suggested that, if the RBA does elect to hike again, this would most likely occur next February.
