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Economist trims rate cut expectations, says ‘high risk’ of further hikes

By Maja Garaca Djurdjevic
3 minute read

Shane Oliver, who was earlier confident in a June rate cut, is now entertaining the possibility of a further rate increase following the latest CPI data.

Ahead of his session at the inaugural Australian Wealth Management Summit 2024, Oliver, AMP’s chief economist, previously confident in a June rate cut, told InvestorDaily he no longer anticipates a rate cut before December.

In fact, Oliver now believes there is a high risk the Reserve Bank (RBA) could opt for another rate hike after the latest Consumer Price Index (CPI) dampened earlier optimism.

Similarly, traders are currently giving a 50 per cent chance that the central bank will raise the cash rate as soon as August in response to inflationary pressures.

Figures from the Australian Bureau of Statistics (ABS) showed on Wednesday that CPI rose 3.6 per cent in the 12 months to March 2024.

CPI climbed 1 per cent over the quarter, up from 0.6 per cent in the December quarter, and defied forecasts of 0.8 per cent from economists.

“The bad news is that it came in higher than expected and so means that rate cuts will be delayed with a high risk of another rate hike,” Oliver said.

“While both annual headline inflation at 3.6 per cent year-on-year and underlying inflation at 4 per cent year-on-year slowed in the March quarter, both came in stronger than our own market and RBA forecasts due to strength in services prices.”

Oliver explained that while headline CPI inflation appears to be on track to reach the RBA’s forecast of 3.2 per cent year-on-year by December, underlying inflation is expected to exceed the RBA’s forecast of 3.1 per cent year-on-year by the same period.

“The combination of sticky services inflation will leave the RBA cautious and still waiting for greater confidence that inflation will return to target in a reasonable time frame and its likely to signal this at its meeting in May,” he said.

“The RBA will likely also debate whether another rate hike is needed. We don’t think it will be or that the RBA will hike again but it is likely to reinstate its tightening bias and another rate hike is now a high risk.”

Oliver acknowledged the increased risk but maintained there’s no immediate need for rate hikes. He still anticipates the RBA could start cutting rates this year, albeit delayed due to setbacks in the March quarter.

“On the back of stronger jobs data and stronger-than-expected March quarter inflation, we have pushed out our expectation for the start of rate cuts from around mid-year to year end and now only expect one cut this year down from three, but we continue to expect two cuts next year,” he said.

On the wider economy, Oliver told InvestorDaily that the economic outlook will remain fairly constrained for the next six months as the impacts of past interest rate rises continue to bear down on the market.

“Most of the economic uncertainty relates to interest rate uncertainty. On top of this, there is an overlay around all of that given the geopolitical uncertainties internationally, including the war with Israel and the risk that Iran might be drawn in,” he said.

However, lower inflation and rate cuts, coupled with tax cuts coming into effect, should lead to stronger economic growth in 2025, Oliver predicted.

At the Australian Wealth Summit, Oliver will outline the economic outlook, unpack how investors could navigate the macro investment landscape in 2024, and engage directly with the audience in an interactive Q&A session.

It will be held on Wednesday, 8 May at The Star, Sydney.

Click here to buy tickets and don’t miss out!

For more information, including agenda and speakers, click here.