Inflation tipped to weigh on December’s rate hike

ANZ’s senior economist, Catherine Birch, expects inflation to “run a little higher than previously forecast”, forecasting the Australian Bureau of Statistics consumer price index (CPI) today (30 November) for the month of October to jump to 7.8 per cent from 7.3 per cent in September.

September’s data followed a fall to 6.8 per cent in August, from 7 per cent in July, but most economists now expect it will go up before falling in 2024, as the Reserve Bank of Australia continues its tightening cycle by raising rates. 

“We still see headline inflation slowing quite sharply next year, largely reflecting easing global and supply-side pressures … ending 2024 at 3.0 per cent YoY, rather than 2.8 per cent YoY,” Ms Birch said.

She added the news comes as the bank’s economists upgraded its wages growth forecast expecting it to accelerate to a peak of 4.3 per cent by late 2023, which would make inflation a bit “sticker”.

The inflationary data comes out ahead of the RBA monetary policy meeting, Tuesday (6 December), where ANZ expects the central bank to lift by 25 bps taking the cash rate to 3.10 per cent.

“We have not pushed our expected peak target cash rate of 3.85 per cent higher, with the timing of the additional 100-bp of rate hikes unchanged (December 2022 and February, March and May 2023),” Ms Birch said.

However, she added that there is a very “real risk” the RBA will need to lift the cash rate into the 4s to deal with persistent inflation pressures.

Given this, ANZ expects the cash rate to remain “higher-for-longer”, with the first rate cut not until November 2024, from August 2024 previously.

This would mean the cash rate target finishes 2024 at 3.6 per cent rather than 3.35 per cent, she said.

With the RBA already on a tightrope, having recently apologised to Australians for its communication failure, when it suggested it would not raise interest rates until 2024, Ms Birch said the review in the RBA could see a shift in it the way it reacts, with implications for the cash rate.

Other economists are more optimistic, with AMP’s chief economist, Shane Oliver, expecting the CPI to lift to 7.4 per cent, up 1 percentage point.

But, he pointed out that the monthly inflation data — a relatively new frequent measure — “misses out” on about 30 per cent of components, such as gas and electricity prices, potentially understating actual inflation.

“That said, a further lift in monthly inflation will add to the expectation for another rate hike next week, particularly after the stronger than expected wages and jobs data of the last few weeks,” Mr Oliver said.

AMP has echoed the 25-bp expectations of many economists, which would take the cash rate to 3.1 per cent.

While AMP’s “base case” is for a 3.1 per cent cash rate peak, the fact that inflation remains well above the target range of between 2–3 per cent, Mr Oliver expects another hike in February (25 bps), with 3.35 per cent being the peak.

“Rates are then likely to be on hold ahead of modest rate cuts possibly starting at the end of next year,” Mr Oliver said.

Commonwealth Bank economists shared similar views forecasting inflation to increase to 7.4 per cent in October, with the trimmed mean expected to lift 5.7 per cent.

“We expect the annual rate of inflation to peak in Q4 22 and ease through 2023,” Mr Oliver said.

Meanwhile, Westpac economist Justin Smirk expects inflation figures will hold steady and remain at September’s 7.3 per cent "considering the partial indicators we have access to".

"In October we note rising auto fuel, holiday travel and restaurant/take out prices offset by falling fruit & vegetables prices, a further moderation in dwelling purchase price inflation and only a modest increase in rent inflation."

Looking ahead he said inflation is expected to peak at 8.1 per cent in the December quarter then moderate to 4.1 per cent by end 2023.

[Related: Communication failure flagged as borrowers get RBA apology]