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Runway to rate cuts grows longer with latest CPI data

By Rhea Nath
5 minute read

While recent figures indicate inflation is continuing to fall, a slowing rate of decline in the March quarter is setting the stage for a “cautious” RBA meeting in May.

Stubborn service cost pressures have seen the consumer price index (CPI) rise 3.6 per cent in the 12 months to March 2024, according to the latest monthly CPI indicator from the Australian Bureau of Statistics (ABS).

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.

Much of the rise was attributed to education (5.9 per cent), health (2.8 per cent), housing (0.7 per cent), and food and non-alcoholic beverages (0.9 per cent), with price rises for tradeable goods continuing to ease at a faster pace than non-tradeable goods as consumers pull back on their discretionary spending.

Still, the quarterly data came in lower than the December quarter when it was 4.1 per cent.

For AMP’s chief economist Shane Oliver, the ABS’ latest figures offer both good and bad news for the Australian economy, particularly with regard to potential rate cuts.

“The good news is that inflation is continuing to fall from its high around 8 per cent at the end of 2022, which still points to rate cuts ahead,” he told InvestorDaily.

“The bad news, though, is that the rate of decline slowed again in the March quarter with both headline inflation at 3.6 per cent year-on-year and underlying inflation at 4 per cent year-on-year coming in slightly higher than expected due to strength in services prices – for rents, education and insurance, in particular.”

With the Reserve Bank of Australia (RBA) slated to meet in two weeks, namely 6–7 May, Oliver expected they would be “still waiting for confidence that inflation will return to target in a reasonable time frame”.

“[The RBA] is likely to signal this at its meeting,” he said.

“Flowing on from this, we have pushed out our expectation for the start of rate cuts from around mid-year to year end.”

Dwyfor Evans, head of APAC macro strategy at State Street Global Markets, also believed the March CPI data weakened the argument for rate cuts in the near future.

Particularly, he remarked the RBA has been “non-committal on its cash rate view”.

“This will bolster expectations that rate cuts remain off the table for now,” Evans observed.

“Notably, our PriceStats Australia online inflation series for April month to date is at multi-month highs and indicates no let-up in the price pressures that have reasserted themselves throughout the course of Q1. Expect a more cautious RBA next week and a potential shift up to revised inflation expectations.”

Earlier this month, the Reserve Bank’s (RBA) March minutes had left the big banks divided in their interpretation of the minutes. While the CBA said they confirmed the evolution in the bank’s policy bias, ANZ emphasised the retention of a hawkish bias, albeit a mild one, and Westpac held a middle-ground perspective, predicting that the RBA will reach the required level of assurance about the path of inflation later in the year.

Rate hikes not entirely ruled out

According to Paul Bloxham, HSBC chief economist, Australia, NZ & global commodities, the latest CPI data is likely to help the RBA feel “vindicated” in its choice in February and mid-March to maintain maximum optionality in its board statements.

It could even translate to a further rise ahead, he observed, though the likely case is to keep rates steady till 2025.

“On our reading of the RBA’s February monetary policy statement, which contained the central bank’s most recent set of published forecasts, today’s trimmed mean inflation print was around 0.2ppts higher than the central bank had been forecasting,” Bloxham said.

“Although the RBA only publishes forecasts in six-monthly intervals (that is, they forecast the trimmed mean to be 3.6 per cent by Q2 2024), they include a chart of the quarterly numbers from which we can visually extract that their forecast was around 3.8 per cent for Q1.

“Combined with the recent jobs figures which showed a more-slowly rising unemployment rate than the RBA had forecast, today’s figures open the door for the RBA to consider lifting its cash rate further.”

Still, the case now is not as strong as it was back in November 2023, when the upside surprise to core inflation was 0.4ppts on the Q3 2023 trimmed mean print, which compelled them to hike.

Instead, Bloxham believed the RBA would hold steady in its upcoming May meeting.

“Our central case has the RBA on hold through 2024, with cuts beginning in Q1 2025, but today’s figures add to our view that there is a non-zero risk that the next move is up,” he said.

VanEck portfolio manager Cameron McCormack said the “hot” CPI print reiterates a “higher for longer” rate regime and agreed that it could necessitate a rate rise if inflation starts to swing upwards again.

“It’s clear many inflationary pressures are supply side driven, creating a headache for the RBA as this limits monetary policy effectiveness and reinforces the likelihood of rates staying higher for longer. At this point, any talk of cutting rates this year is verging on fantasy,” he said.

He highlighted a number of key considerations for economists, including wages growth above the RBA’s published target rate of 3.5 per cent that is not supported by productivity gains, rather high minimum and award wage increases and removal of public sector wage caps, and geopolitical tensions in the Middle East that see energy and goods prices pick up.

He pointed out: “One catalyst could be the Red Sea Crisis which resulted in shipping prices tripling. Last time shipping prices spiked, we didn’t feel that pain via goods prices for six to 12 months after.”

Crucially, while core inflation has declined significantly from its 2022 peaks, it remains well above the RBA’s 2–3 per cent target band.

While acknowledging the fall in the inflation rate in the March quarter is “welcome news”, CreditorWatch chief economist Anneke Thompson believed the data is “unlikely” to bring forward a cut to the cash rate.

She cautioned: “This means that businesses should brace themselves for the cash rate to remain at 4.35 per cent, at least until the fourth quarter of 2024.

“The longer interest rates remain high, the more difficult trading conditions will be for the discretionary retail trade, food and beverage and construction sectors, and we expect a continuation of rising insolvency rates in these sectors as a result.”