In his latest update, AMP’s chief economist noted that there is still a potential risk that the Reserve Bank of Australia might decide to raise rates once more, even though the central bank declared its second consecutive pause earlier this month.
Acknowledging recent “mixed messages” on Australian interest rates, Shane Oliver said AMP’s base case “remains that we have seen the top or if not are now very close to it”.
“On the one hand, the NAB business survey reported a renewed surge in labour costs and selling prices in July likely reflecting the faster increase in minimum and award wages this year, the Superannuation Guarantee increase and higher power prices providing a reminder that the risks for interest rates are still on the upside,” Dr Oliver explained.
“Against this though the ABS’ Household Spending Indicator has slowed to a crawl in nominal terms suggesting that overall real consumer spending may have gone backwards in the June quarter. This is telling us that demand is rapidly slowing and this will push inflation down as companies discount to clear stock and cut hiring and so the RBA should continue to exercise patience and so leave rates on hold.
“Our base case remains that rates have peaked (with 60 per cent probability) but the risk of another hike is high (at 40 per cent),” he added.
Turning to the US scenario, Dr Oliver applauded the good news on US inflation in July – with CPI inflation rising to a lower than expected 3.2 per cent.
“With the base effect of high inflation a year ago dropping out of annual calculations behind us, energy prices on the rise again and food price inflation unlikely to slow much further progress in lowering inflation may slow in the months ahead, but this could be offset by a continuing slowing in core inflation particularly as rent inflation slows. Our US Inflation Indicator continues to point down,” he said.
Continuing disinflation in the US is good news, Dr Oliver assessed.
“US inflation also led inflation in other countries on the way up so its decline augurs well for other countries including Australia,” he explained.
Dr Oliver emphasised that despite a generally mild tightening bias among Federal Reserve speakers, the July inflation data aligns with the likelihood of the Fed maintaining its current stance at its September meeting.
Earlier this month, the RBA signalled that further rate hikes remain firmly on the table.
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” outgoing RBA governor Philip Lowe explained in his post-meeting statement.
“In light of this and the uncertainty surrounding the economic outlook, the board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
At the time, Dr Oliver asserted that the RBA had already done more than enough to slow the economy in order to bring inflation back to target.
