With inflation edging up to the Reserve Bank’s target range, AMP is confident the central bank will slowly start lifting rates in late 2022.
Underlying inflation figures (the RBA’s preferred measure of inflation) rose by 0.7 per cent in September to be 2.1 per cent higher over the year – the highest annual rate since late 2015.
And while AMP’s chief economist, Shane Oliver, believes the RBA won’t be satisfied yet that inflation will be sustained in the target range, he has tipped the central bank would make further monetary stimulus cuts ahead of gradual rate hikes next year.
“With the economy now recovering again, we believe that the conditions for the start of rate hikes will now be in place by late 2022 so we are now pencilling in a small increase in the cash rate from 0.10 per cent to 0.25 per cent in November next year and a 0.25 per cent hike in December 2022, taking the cash rate to 0.5 per cent by the end of next year,” Mr Oliver said.
In the interim, Mr Oliver expects the RBA to further taper its bond buying in February next year and to remove the 0.1 per cent yield target for the April 2024 bond sometime in the next three to six months.
Headline consumer prices rose by 0.8 per cent in the September quarter to be 3 per cent higher over the year, this was in line with market expectations.
Stagflation a possibility?
Similarly, Russel Chesler, head of investments and capital markets at VanEck, tipped that the boost in inflationary pressures could lead to two official rates rises by the end of 2022.
Mr Chesler also warned investors to prepare for the likelihood of stagflation.
“Stagflation is now a possibility – rising costs against stagnant economic growth. Investors need to prepare for this scenario,” said Mr Chesler.
“With oil heading towards US$100 a barrel, an emerging energy crisis in China and Europe, we may see economic growth slow to a crawl in the coming year as the prices of oil and other basic goods climbs in response to stronger demand and supply constraints.”
But while VanEck has been prodding the stagflation scenario for some time, Oxford Economics said last month that fears of both runaway inflation and stagflation are misguided.
“With demand cooling and supply gradually rebounding, we expect inflation to cool in the coming quarters,” Oxford Economics predicted at the time.
