On the back of the recent pause by the Reserve Bank of Australia (RBA), economists at NAB have predicted that the central bank will hike one more time in the current cycle.
The NAB economists, led by Alan Oster, previously predicted that the cash rate would peak at 4.6 per cent. But they now believe a peak of 4.35 per cent will most likely be reached at the RBA’s November meeting following the release of the third quarter consumer price index (CPI).
“With recent data showing a clear trend of easing inflation and slower demand growth, the probability that 4.1 per cent is the peak for the cycle is growing – particularly given the RBA’s stated intention to seek to maintain the pandemic-era gains in the labour market,” they noted.
“However, a number of near-term upside pressures remain likely to challenge the RBA’s risk tolerance around inflation – particularly on the services side.”
According to NAB’s economists, August’s post-meeting statement appeared to show that the softer than expected inflation figures seen during the second quarter had little impact on the RBA’s forecast for inflation to return to the top of its 2–3 per cent target range by mid-2025.
If the third quarter CPI does exceed the RBA’s expectations – in either the monthly or full quarterly print – NAB noted that this would likely challenge its current forecast path for inflation.
“Outgoing governor Philip Lowe has previously stated that this forecast path represents the limit of what the board is willing to tolerate and we see no reason for this to change under incoming governor Michele Bullock,” the bank’s economists said.
To further support their argument for another rate hike, the NAB economists also highlighted the warning in Dr Lowe’s post-meeting statement that “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame”.
“On balance, we still see the RBA as likely to take out some additional insurance to ensure inflation remains on track to return to target by mid-2025 as currently forecast,” they said.
“However, the activity data flow is unlikely to provide scope for more than 25 bps of rate increases and as such, we now see one further hike to a peak of 4.35 per cent.”
NAB is now the only big four bank to foresee another rate hike on the horizon. ANZ, which correctly predicted the August pause, remains of the belief that the RBA is now on an “extended pause”.
The Commonwealth Bank and Westpac, which both predicted a 25 basis point hike in August, have now shifted their forecasts to an extended pause by the RBA.
CBA senior economist Belinda Allen said that the hurdle to another rate hike would be high.
“It would take an upside surprise to the economic data from here, namely on prices and/or wages, for the RBA to shift its assessment of the outlook,” she said.
“Our base case now is for the RBA to be on hold at 4.10 per cent for an extended period. Although we acknowledge that the risk remains for another rate hike based on the forward guidance and the resilience in the labour market.”
Meanwhile, Westpac chief economist Bill Evans suggested that the next challenge for the outlook should be in relation to the timing for the beginning of the easing cycle.
“We do not expect a data flow over the next month that would trigger that hike in September, although the monthly inflation indicator always represents a risk,” he noted.
“Thereafter the weak outlook for activity and the slowing in inflation is likely to preclude any further need for higher rates. The next move is now likely to be the first cut in the cycle which is forecast for the September quarter of 2024.”
NAB has predicted that the RBA will begin cutting rates in August next year, while CBA expects that the easing cycle will commence sometime in the first quarter.
