The Commonwealth Bank updated its forecasts for global monetary policy in a new analysis issued on Friday (20 October) in response to the latest economic indicators, which suggest the fight to quell inflation may endure beyond initial expectations.
The bank had forecast cuts to the official cash rate in Australia by March next year but has now pushed back relief to June 2024.
“Inflation is retreating but remains too high. Services inflation in particular is proving sticky,” CBA observed.
According to the bank’s research arm, this stickiness is underpinned by continued tightness in the labour market, as evidenced by the latest labour force data from the Australian Bureau of Statistics (ABS).
“High services inflation is linked to the tight labour market. There is a risk of hikes in official interest rates before year end in Australia, Canada, the UK, and the US,” CBA added.
Ultimately, however, aggressive monetary policy tightening from the world’s central banks over the past year would slow consumption “well after central banks stop hiking”.
CBA continued: “In our view, the most important decision for central banks in 2024 will be when to start cutting their policy interest rates. The unexpected stickiness of inflation has encouraged us to delay when central banks start cutting from early 2024 to the middle of 2024.
“Further loosening of labour markets will be an important trigger for central banks to start cutting policy interest rates.”
As for the scale and speed of the monetary policy easing in Australia, CBA is projecting a cumulative 100 bps in cuts by the Reserve Bank by December 2024.
CBA’s revision also comes amid renewed hawkishness from the Reserve Bank of Australia (RBA) in minutes released from the September monetary policy board meeting.
The central bank stressed it has “low tolerance” for slower progress to the 2–3 per cent inflation target than currently expected.
The RBA’s tolerance will be tested next week following the release of the latest quarterly consumer price index (CPI).
The Commonwealth Bank has said it expects headline inflation to rise 0.9 per cent over the quarter, falling to 5.1 per cent on an annualised basis.
However, CBA acknowledged the risks to its inflation forecast are “skewed to the upside”.
ANZ Research is less optimistic and has projected a quarterly headline CPI print of 1.1 per cent or 5.3 per cent on an annualised basis.
But the bank said the RBA may “look through” a tighter CPI result during its next monetary policy board meeting on Tuesday, 7 November.
“For now, our expectation remains that the RBA is on an extended pause, although the risk that rates increase this year or early next has risen,” ANZ Research noted.
Economists are split ahead of the November meeting, with many expecting one final hike to the cash rate.
AMP Australia’s deputy chief economist Diana Mousina, however, has said a hike would represent a “policy mistake”, given the full impact of the RBA’s 400 bps in cumulative tightening has not been felt by households.
Additional tightening, she said, would heighten the risks of an Australian recession in 2024.
