Higher than expected inflation figures to delay rate cuts, say economists
An interest rate cut is unlikely to occur until next year now with the consumer price inflation data for March above market expectations.
The Consumer Price Index (CPI) rose 1 per cent in the March 2024 quarter and 3.6 per cent annually, according to the latest data from the Australian Bureau of Statistics (ABS).
ABS head of prices statistics, Michelle Marquardt, said the CPI rose 1 per cent in the March quarter, higher than the 0.6 per cent rise in the December 2023 quarter.
“Annually, the CPI rose 3.6 per cent to the March 2024 quarter. While prices continued to rise for most goods and services, annual CPI inflation was down from 4.1 per cent last quarter and has fallen from the peak of 7.8 per cent in December 2022,” said Marquardt.
AMP deputy chief economist Diana Mousina said the 1 per cent rise in headline inflation was stronger than the markets had forecasted.
“Despite the upside surprise to inflation in March, there has been significant progress in reducing inflation with the headline inflation data at its lowest level (in annual terms) since December 2021,” said Mousina.
“The bigger issue is that trimmed or core inflation is too high and that the quarterly pace of growth increased rather than decreased in March.”
AMP said the higher-than-expected figure means that there is a risk that the Reserve Bank of Australia (RBA) will revise its forecasts in their update in early June.
“This may see the RBA move back to a tightening bias as the board may debate whether another rate hike is needed. Our view that rate cuts would start around mid-year has been challenged by the stronger economic backdrop and low unemployment rate which has led to inflation staying elevated,” said Mousina.
“Today’s inflation data removes the chance of any near-term rate cut. However, we think we can still see a rate cut by the end of the year as the leading indicators of softer employment growth, lower inflation and subdued consumer spending remain intact.”
BDO EconSearch partner Anders Magnusson agreed that with inflation plateauing rather than continuing downwards, BDO now forecasts the first rate cut to be early next year.
He said the stage three tax cuts are a crucial factor to consider in the outlook as well.
“While the tax cuts with ease cost-of-living pressures for many people, we also expect them to increase demand, extending the wait for lower inflation and the first cash rate cut,” said Magnusson.
“Future Made in Australia is another risk. While incentivising progress towards net zero, it does so at a time of full employment, which risks inflation through further increasing competition in an already tight labour market.”
RSM economist Devika Shivadekar said this week’s figures are higher than what the RBA would have preferred, even without considering the yearly price adjustments in the education and health sectors.
"Recent developments in the US highlight the need for caution in the final stages of the fight against inflation, more so in Australia, where rebates continue to keep actual prices muted in critical sectors,” said Shivadekar.
“Add to the mix a rather resilient labour market as evidenced in the data earlier this month, the RBA is bound to stay higher for longer.”
RSM Australia expects the RBA’s next forecasts will likely reflect increasing concerns about the delay in inflation returning to target levels.
“Domestically driven inflation would likely be pushed higher by the federal budget being more stimulatory than not as the federal government aims for ‘sustainable’ growth in addition to the tax cuts from July which will in principle increase disposable income significantly for most Australian households,” said Shivadekar.
