AMP chief economist Shane Oliver believes the Reserve Bank of Australia (RBA) is edging closer to a pause in June, but warns policymakers remain deeply concerned inflation could become entrenched after years above target.
Speaking on the Relative Return Insider podcast, Oliver said last week’s RBA minutes painted a more cautious picture than the messaging delivered immediately after the central bank’s last meeting, suggesting policymakers now had “some space” to assess the cumulative impact of recent rate hikes and geopolitical risks.
“The minutes do give the impression that they now have some space to reflect, obviously, on the three rate hikes that we’ve seen, and the impact of the war, and what it means for households and businesses in Australia,” he said.
Although Oliver said the June meeting increasingly looked like a pause rather than another hike, he stressed the RBA’s broader inflation concerns had not eased.
“I got the impression from the minutes that they are more inclined to wait at the next meeting, that the odds of a rate hike in June are fairly low,” he said.
At the centre of the Reserve Bank’s concern, according to Oliver, is the risk Australians begin to accept elevated inflation as normal after inflation spends five of the last six years above the RBA’s target band.
“The longer that’s the case, the less likely people are to believe that inflation will come back to target,” he said.
Oliver pointed to recent comments from RBA chief economist Sarah Hunter, who warned the economy entered the inflation shock with limited spare capacity and already elevated price pressures.
He also referenced new RBA research showing companies adjust prices more frequently during periods of high inflation, increasing the risk inflationary behaviour becomes embedded across the economy.
“You’d always expect that when prices are changing or rising rapidly, that means companies have to put them up more quickly,” Oliver said.
Despite those concerns, weaker labour market data has shifted expectations for near-term monetary policy. Australia’s unemployment rate rose to 4.5 per cent in the latest ABS figures, although Oliver questioned whether the jump reflected genuine economic weakness.
“These unemployment numbers do bounce around a little bit,” he said.
Oliver said the rise appeared distorted by a sharp fall in female employment, particularly in Queensland, alongside seasonal disruptions including school holidays and recent ABS survey methodology changes.
“You’ve really got to wait till next month to see whether that 4.5 per cent number is sustained,” he said.
Still, the data materially changed market expectations around the June meeting.
“I did see the money market, which had prior to the meeting, was looking for something like an 18 per cent chance of a hike in June, dropped down to 6 per cent or 7 per cent chance of a hike in June,” Oliver said.
Attention now shifts to the next monthly inflation release, which Oliver expects to show headline CPI easing modestly from March’s 4.6 per cent reading as petrol prices retreat following the government’s temporary fuel excise cut.
However, he warned underlying inflation would likely remain stubbornly high.
“The Reserve Bank will focus particularly on the underlying measures of inflation, and they’ll probably show a slight rise from 3.3 per cent in March to 3.4 per cent in April,” he said.
Beyond domestic inflation, Oliver argued geopolitical tensions in the Middle East remained one of the largest risks facing global markets and central banks.
He said investors were continuing to hope for a resolution between the US and Iran that would reopen the Strait of Hormuz and ease pressure on global energy supplies.
“The key in all of this, in terms of the global economy and sharemarkets, is the strait,” he said.
“If the Strait of Hormuz reopens, markets would breathe a sigh of relief, oil prices would come down and share markets would go up.”
Oliver also warned investors were underestimating mounting risks in global bond markets as inflation pressures, public debt and expectations for higher rates pushed yields steadily upwards.
He said economies and financial markets had become accustomed to ultra-low rates over the past two decades, making the adjustment to structurally higher borrowing costs increasingly painful for households, governments and investors alike.
“So far, it hasn’t, but it could be a risk going forward,” Oliver said of the threat rising bond yields could eventually place on equity markets.
