The Reserve Bank of Australia (RBA) is expected to deliver two more interest rate hikes by the fourth quarter of this year, according to new predictions from Franklin Templeton, taking the cash rate to 4.60 per cent.
In its latest Central Bank Watch report, the global asset management firm suggested the RBA was facing a “complicated trade-off” in its monetary policy decisions after so far failing to get inflation under control, despite the 400 basis points (bp) of tightening announced to date.
While acknowledging that headline inflation had softened during the month of May, Franklin Templeton pointed out that employment indexes remained robust and noted that inflation, excluding volatile components, remained “sticky” given ongoing elevated unit labour costs.
“We expect that wage growth, although still steady, could rise as minimum wages are raised and public sector wage caps are removed,” the firm said.
“Relatively robust property prices in the last three months complicate this delicate balance for the central bank even further as it challenges the traditional impact of monetary tightening.”
Before inflation returns to RBA’s target range of 2 to 3 per cent, Franklin Templeton predicted that consumption will remain weak and said the unemployment rate will likely rise to 4.5–5.0 per cent, up from 3.6 per cent according to the latest figures from May.
“While the likelihood of an outright recession is low, it cannot be ruled out completely as risks to the inflation outlook remain firm,” the firm warned.
Beyond the two 25 bp hikes currently forecast — the first of which is expected to occur in August — the path of interest rates is expected to be “data-dependent”, according to the firm.
“It’s no surprise therefore that market pricing cuts in late 2023 have all but dissipated,” Franklin Templeton concluded.
This came after RBA elected to keep the cash rate on hold in July, the second time it has done so during the current tightening cycle which first kicked off in May last year.
HSBC chief economist Paul Bloxham said that RBA’s latest decision reflected the board’s “narrow path” strategy to return inflation to target without tipping the economy into recession.
“After hiking substantially and continuously until March (by 350 bp), pausing in April and then adding two more additional (surprise) hikes just in the past two months (another 50 bp), there is, as the RBA noted today, ‘considerable uncertainty surrounding the economic outlook’ and the likely impact of the central bank’s tightening,” Mr Bloxham said last week.
“Most of the economic indicators that have been published recently and have attracted market focus — like employment and retail sales — were for May, which predates the June tightening and where little of the effects of the May tightening are likely to have shown through either.
“In addition, as always, the effects of monetary policy are lagged and the largest part of the fixed rate mortgage reset (the so-called ‘fixed rate mortgage cliff’) to higher variable rates has only just got going in June.”
More tightening expected from global central banks
Franklin Templeton noted that most global central banks had turned more hawkish given the tightness in labour markets and the stickiness of services inflation.
Alongside its predictions for two more rate hikes in Australia, the firm said more tightening was also in the pipeline globally, including in the US, the EU, and the UK.
“Although the US Federal Reserve refrained from hiking in June, it left the door open to at least two more 25 bp rate hikes in 2023 on stronger-than-anticipated economic data,” Franklin Templeton said.
“Meanwhile, the European Central Bank (ECB) continued hiking in June and largely committed to a hike in July on stickier core inflation and wage growth expectations.”
In the US, Franklin Templeton forecast that the Fed will deliver one more 25 bp hike later this month, taking the funds rate to 5.25–5.5 per cent. However, the firm noted that a final 25 bp hike towards the end of the year “will not come as a surprise if the data warrants it”.
For the ECB, the firm predicted that a 25 bp hike will be announced in July, with an additional 25 bp hike to 4.0 per cent seen as being likely in the absence of a downward surprise in core inflation.
Turning to the Bank of England (BoE), Franklin Templeton predicted at least two more hikes will be announced in the bank’s upcoming meetings, with a terminal rate of 5.50 per cent.
“However, another strong labour market print could tilt the BoE to deliver another 50 bps move in August and an overall tighter stance,” the firm added.
