News ArticleNews Article Inflation Spike Complicates Interest Rate Predictions Published: June 27, 2024 Author: N/A Body: Rising inflation has become a major concern for the government, which is struggling to assure Australians that it understands their financial struggles and has solutions to prevent a feared interest rate hike. The path to an inflation rate acceptable to the Reserve Bank of Australia (RBA) seems uncertain, complicating predictions about the next interest rate movement. The 4% inflation figure for May, released on Wednesday, surprised financial markets and prompted economists to revise their interest rate forecasts. Under pressure borrowers may have to wait longer for rate cuts, with economists warning that a rate hike could happen at the RBA’s next meeting in August. Finance Minister Katy Gallagher stated that while interest rate movements are not the government’s decision, its policies aim to help mitigate the situation. She highlighted budget measures such as tax cuts and cheaper medicines, which will alleviate cost of living pressures. NAB now predicts interest rate cuts to begin in May 2025, instead of November 2024. Chief Economist Alan Ooster suggests that the RBA may consider a “lower-for-longer” approach, keeping interest rates low for an extended period. Other economic teams have also adjusted their rate cut expectations, with Shane Oliver of AMP warning that the RBA’s path to controlling inflation while preserving the labor market is becoming more challenging. The trimmed average index rose 4.4% in May, while a measure of underlying inflation fell to 4%. The higher-than-expected inflation spike may increase the likelihood of a longer wait for interest rate cuts.
An inflation binge has put the government on the defensive as it seeks to reassure Australian households that Labor understands their pain and has the policy settings to avert a feared rate hike.
The road back to an inflation rate acceptable to the Reserve Bank of Australia appears to be bumpy, which complicates predictions about the next interest rate movement.
The 4 percent inflation figure for May released on Wednesday shocked financial markets and prompted several economists to revise their interest rate forecasts.
For under-pressure borrowers, the wait for rate cuts is likely to be longer, with economists now warning there is a chance of a rate hike at the bank’s next meeting in August.
Asked whether the May price rise meant a rate cut could be ruled out, Finance Minister Katy Gallagher said while it was not the government’s job to dictate interest rate movements, its policy setting would help.
Katy Gallagher says the government is doing what it can to reduce inflationary pressures. (Lukas Coch/MONK PHOTOS)
“The government’s job is to ensure that we do what we can to put downward pressure on inflation, but also to alleviate pressure on the cost of living, which you rightly point out is the most important issue is facing households,” Senator Gallagher told ABC Radio. on Thursday.
The government’s budget measures from July 1 – including tax cuts, energy bill relief and cheaper medicines – will help alleviate these pressures and should feed into the cost of living index, she added.
“Inflation has been rising for longer than we would like, but I must point out that it is still lower than when we came into government.”
In the meantime, banks and economists are raising their expectations for expected interest rate cuts.
National Australia Bank now expects interest rates to start falling from May 2025 – a much longer wait than the previously planned November 2024.
Economists warn that the latest inflation figures could mean a longer wait for interest rate cuts. (Flavio Brancaleone/AAP PHOTOS)
“The mix of slow growth and gradual progress on inflation reflects the RBA’s decision to embrace a ‘lower-for-longer’ approach – a lower peak in interest rates compared to other advanced economies, resulting in a longer period at that peak,” said Chief Economist Alan Ooster.
An increase at the August meeting was possible, Mr Oster added, but the most likely scenario was that the central bank would leave the 4.35 percent cash rate unchanged – again – as inflation gradually slows. in addition to a weakening labor market.
Another acceleration in the monthly inflation gauge, which is volatile and not as comprehensive as the quarterly release, was expected in May, but the jump exceeded expectations.
The four percent increase in the 12 months to May took annual inflation to a six-month high and was above the consensus market forecast of 3.8 percent.
The trimmed average index rose 4.4 percent, up from 4.1 percent in April, but a separate measure of underlying inflation, which excludes gasoline and other volatile items, fell to 4 percent from 4.1 percent.
The economic teams at RBC Capital Markets, Nomura and AMP Australia have also pushed back their expected start dates for rate cuts, following inflation data.
AMP chief economist Shane Oliver warned that the central bank’s path to slowing the economy enough to reduce inflation while preserving the labor market is becoming even narrower.
“The ‘narrow path’ of doing too much and ending up in recession and doing too little and maintaining high inflation appears to be getting narrower and narrower,” wrote Dr. Oliver in a client note.
