Higher-than-expected inflation will take at least 12 months to approach the Reserve Bank of Australia’s (RBA) target, raising doubts about Treasurer Jim Chalmers’ optimistic forecast and complicating prospects for interest rate relief before the next federal election.
A quarterly survey by The Australian Financial Review, polling 38 economists, reveals that the median expectation for underlying inflation to return to the 2-3% range is not until next June. This diverges from Dr. Chalmers’ confident statement on Sunday that the consumer price index (CPI) could align with Treasury’s 2.75% estimate by December this year. He acknowledged the impact of interest rate rises but maintained that inflationary pressures would ease, albeit irregularly.
The government’s $300 energy bill rebate per household is projected to reduce headline inflation by 0.5 percentage points to meet the 2.75% forecast by late this year. However, RBA Governor Michele Bullock has indicated that this “temporary” reduction will be overlooked, anticipating a reversal when the subsidy expires in 12 months.
Recent data showing a rise in the annual inflation rate to 4% for May has prompted more economists to predict a rate increase in August. The median forecast among 37 economists is for rate cuts to begin in February next year. Warren Hogan of Judo Bank, noted for his accurate predictions, argues that the RBA needs to intensify its efforts to control inflation, suggesting that rate relief might not come until the latter half of 2025.
Financial markets have reacted sharply to the inflation shock, with interest rate traders assigning a significant probability of a rate hike by August. This sentiment contrasts with the median economist view, which anticipates the RBA’s rate cuts starting in February 2024.
Economists are now less unified in their predictions compared to last year. Some, like Judo’s Hogan and Rabobank’s Benjamin Picton, foresee rates climbing to 4.85% by December, remaining at that level until mid-2025. In contrast, major banks like Commonwealth Bank and Westpac forecast rate cuts later this year, while National Australia Bank and ANZ project easing next year.
The June quarter inflation results, due on July 31, are poised to influence the RBA’s decision. Analysts like Picton believe an upside surprise in core inflation or stronger services inflation could trigger a rate hike. Conversely, economists such as MLC Asset Management’s Bob Cunneen see a high June CPI result as the only justification for tightening, which he deems unlikely due to a weakening economy.
As inflation predictions vary, the RBA’s next moves remain closely tied to upcoming data, highlighting the uncertainty in Australia’s economic outlook.