AMP’s chief economist Shane Oliver is expecting one further rate hike in 2026, after a triple-reversal on last year’s cuts, but says a fourth lift would likely be several months away.
The Reserve Bank of Australia (RBA) enacted its third rate hike this year with a move this week from 4.1 per cent to 4.35 per cent.
Speaking on Investor Daily’s upcoming Relative Return Insider podcast, he said: “[The RBA] will probably want to pause for a while and see what the impact has been, see what’s happening with the war and so on. I think we’ll probably see a hold in June, then maybe one more hike. I’d say it’s a close call, but that said, if you’re forcing me to put a forecast out, I’d say they probably will. And then, that’ll be it.”
Oliver says the hike was no surprise to him, in response to inflation running above target and concerns that it will likely remain so for longer given price pressures partly flowing from the war with Iran, threatening higher inflation expectations.
“The RBA has now reversed all of the three rate cuts we saw last year, which followed 13 rate hikes in 2022 and 2023,” he said in a note to investors,” Oliver said. “The last experience back in 2022-23, when rates went up, told us that rate hikes did work in slowing the economy down and getting inflation back under control.
“Unfortunately, we then saw those rate cuts last year, and of course, the economy started to pick up, and lo and behold, we then got a renewed inflation problem, which has then been made worse by the war in the Middle East.”
The result of this monetary policy, he said, has become “messy”.
“History tells us that higher rates do slow growth in the economy, do slow demand, and ultimately will bear down on inflation.
“So I think it will work. I think the debate is about whether we’re going to need more rate hikes from here. My feeling is we’re either out or close to the top. We are penciling in one more hike, probably in August,” he said.
According to Oliver, key emerging data to watch for future rate decisions will be inflation and unemployment.
“If we start to see a sharp rise in unemployment and inflation turns out to be not much worse, then that will probably put a brake on the Reserve Bank. If, alternatively, unemployment stays low as it has been, and inflation numbers stay high or continue to rise, then I think the Reserve Bank would move again,” Oliver said.
“The Reserve Bank’s forecasts show inflation, or the trim mean, actually going up a little bit further from here, and then only coming down through next year. It sort of gets worse before it gets better, and those forecasts are predicated on there being one and a bit more hikes.”
The big difference at the recent RBA meeting was the decision being close to unanimous, with an 8 to 1 vote in favour of hiking versus holding compared to a split 5 to 4 vote in March.
“The board members have become a bit more hawkish. And a bit more concerned about things. I think maybe back in March, they were thinking the war would be over relatively quickly. I thought the same thing.”
Oliver said the current environment has some parallels with the 1970s where a series of supply shocks combined with inappropriately easy monetary (and fiscal) policy to produce stagflation ultimately requiring very tight monetary policy to get inflation back down.
“There are some parallels that, back in the 70s, we were starting to see bigger government, more regulation, deglobalisation, we had the ongoing Cold War, the Vietnam War was being financed by money printing. Then we had oil shock number one, which was in 1973, and then oil shock number two in 1979,” he said.
“Central banks left interest rates too low for too long, and unfortunately, inflation got entrenched in the system. I think central banks now, at least the RBA, are sort of conscious of the lesson from that period, that they can’t let it get out of hand.”
He added that the longer the Strait of Hormuz remains blocked, the greater the risk of recession in response to fuel rationing which would ultimately depress underlying inflation allowing a return to rate cuts next year.
Meanwhile, with the Federal Budget set to be handed down on 12 May, Oliver believes the best thing the government can do to help alleviate underlying inflation pressures is to lower the level of public spending and introduce reforms to help boost productivity and hence capacity in the economy.
“I think this year’s budget’s probably more important than most. I mean, there’s a lot of expectations riding high, because we all know that productivity has been weak, and that is constraining living standards in Australia,” Oliver said.
“The government responded last year with the Economic Reform Roundtable, and so there’s a lot of expectations that the government will deliver in three areas. This is what I’m hoping for, some reduction in government spending over time. Not instantaneously, but over time, they should look to slow down government spending as a share of the economy back to more normal levels.”
