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Cash rate peak may hit 5.1%: Economist

Interest rate hikes may continue to rise in the later half of the year, an economist has said.

Judo Bank’s chief economic adviser Warren Hogan has said the bank has changed its central case economic forecast to project a peak cash rate of 5.10 per cent in 2024.

According to Hogan, he expects the Reserve Bank of Australia (RBA) to commence hiking interest rates once again starting in August this year, followed by two more rate hikes in September and November.

He stated that the flow of economic data over the last six weeks has “shifted the most likely path” for the economy and inflation.

“Signs of a recovery in economic activity this year and sticky domestic inflation imply that for the economy to remain on the RBA’s ‘narrow path’, a further upward adjustment to interest rates may be required in the 2024/25 financial year,” Hogan said.

“We expect the RBA to raise the cash rate by 50–100 basis points later this year. The RBA board will not raise interest rates unless they absolutely have to.

“The case for higher interest rates will have to be strong and have widespread support from mainstream commentators.”

Indeed, the latest Consumer Price Index (CPI) data released by the Australian Bureau of Statistics (ABS) revealed a stronger-than-expected rise in quarterly inflation by 1 per cent, up from 0.6 per cent recorded during the December quarter of 2023.

Despite the larger quarterly rise, annual inflation continued to ease from its 7.8 per cent peak in December 2022, falling to 3.6 per cent from 4.1 per cent in the previous quarter.

Hogan stated that the latest inflation report confirmed that domestic inflation “is stubbornly high” at around 4–4.5 per cent.

“There is mounting evidence to suggest that the current cash rate of 4.35 per cent is not high enough to restore price stability to the Australian economy,” Hogan said.

However, Hogan does include the caveat that there is still a “good chance” that the RBA will not need to increase interest rates over the year ahead, but the economy’s performance so far this year has made a hike scenario “the most probable”.

Commenting on potential rate cuts in 2024, ANZ head of Australian economics Adam Boyton said the March quarter CPI print has caused markets to “price out any prospect of a rate cut this year”.

“In fact, markets are now implying a small probability of a rate hike over coming months,” Boyton said.

Boyton added that while headline CPI was “worse than expected”, it was not “calamitously so”.
“The message we are inclined to take from the CPI is: be patient. That doesn’t just apply to the economic data flow, but it also applies to the easing cycle.

“It is likely to start late this year (at the earliest) and will be very mild. Our forecasts remain a November start, with just 75 bp of easing in total over 2024 and 2025,” Boyton added.

Westpac chief economist Luci Ellis said that evidence of a slower-than-expected pace of disinflation during the opening quarter has “coincided with a firmer set of data prints on the labour market over recent months”.

“The balance of risks points to the RBA Board retaining a cautious perspective over the next few months, as new information on the labour market, prices and economic growth are closely scrutinised for signs of upside risk to the inflation outlook,” Ellis said.

“All in all, we still anticipate that there will be no change to the RBA’s policy stance in May; however, we now expect policy to remain on hold for longer, with the first rate cut now forecast to occur in November rather than September.

“Thereafter, and assuming no further upside surprises to inflation, the RBA will have scope to lessen the contractionary setting of monetary policy at an incremental and measured pace. We expect 25 basis points of rate cuts per quarter through to Q4 2025, to a terminal rate of 3.10 per cent.”

[RELATED: March CPI overshoots RBA and lender expectations]

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