MNI: Bar Remains High For Renewed RBA Hiking – Ex-Staffers

Australia’s Q1 CPI outturn has eliminated prospects for a 2024 rate cut, according to market pricing, but whether the Reserve Bank of Australia will need to increase rates again to pull inflation back to target without impacting its already generous timeline remains debatable, former RBA staffers tell MNI.

The market’s reaction to last week’s higher-than-expected 3.6% y/y CPI result -- Australian dollar-dated overnight index swaps priced in a 50% chance of a rate hike this year -- was overdone, said Luke Hartigan, former RBA economist and lecturer at the University of Sydney. The stronger components of last week’s print, such as education, insurance and house rentals, were little affected by monetary policy, he said.

Hartigan does not see a return to multiple cash-rate hikes as justified, but added: “I can't rule out one hike, but I don't think we’ll see anything until the June quarter to get confirmation that there's there is an (inflation) uptick and not just something driven by seasonal patterns.

“Interest rates are actually not very restrictive, so [the RBA] has to hold them at that rate a little bit longer than they would otherwise, because they're not really having as much of an impact on demand that they would otherwise. Real rates are only mildly positive," he said.

Hartigan told MNI earlier in the year rate cut expectations – the market had priced in a 3.9% cash by December – were probably premature. (See MNI: RBA Rate Cut Talk Premature - Ex Staff)

MARKET NARRATIVE

Hartigan added Australian investors were unduly influenced by offshore developments, particularly those of the U.S. Federal Reserve, which led to the overreaction following the CPI print as investors quickly moved to adjust their view.

Martin Eftimoski, head of research and acquisitions at property development and construction company Eternal Homes Projects and a former RBA economist, said the Q1 CPI print had blindsided the market. “There's a lot of variants in a lot of key indicators right now and that's creating a really wide band of estimation of future scenarios,” he observed.

Eftimoski declined to forecast the RBA’s cash rate, but noted the Reserve had made it clear the economy is on a very “narrow path back to the (inflation) band.”

“Any deviation from that narrow path will trigger a response,” he continued. “The latest CPI print is neither here nor there. It's not a full clear statement that were off that path, nor is it really comforting evidence that we're on it.”

UPDATED FORECASTS

Eftimoski doubted whether the RBA would push out its late 2025 timeline to return inflation back to the 2-3% band.

Hartigen said the RBA could shift its forecasts as the statement will already be hung off higher-than-anticipated inflation. “If you think about the curve of where inflation will be coming down, that could shift up and if nothing else changes, that will just mean a little bit longer – perhaps one or two quarters,” he said, adding. “It’s still an enormous amount of time for inflation to be out of band.”

The market has since pared back hike expectations and now sees a 15% chance of a move higher at the June 18 meeting. The RBA last hiked the cash rate 25 basis points to 4.35% in November.

The RBA Board will deliver its next decision on May 7.