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Bendigo Bank’s July Economic Update

5 July 2024 |Announcements
David Robertson says inflation data pushes out rate relief to May 2025 but not strong enough for a hike.

In his July Economic Update, Bendigo Bank’s Chief Economist David Robertson is holding firm on his long-held view the RBA cash rate will remain unchanged throughout the year, with rate cuts likely to come in 2025.

While the country saw another disappointing monthly inflation figure in the May data, Mr Robertson has today shared his thoughts on the market’s response to a monthly data point.

“There is no doubt the monthly CPI indicator for May was a setback to progress on inflation, with headline CPI jumping to 4 per cent and the core trimmed mean also higher at 4.4 per cent - however some of the detail within the report was less conclusive,” Mr Robertson said.

“While the May data does increase the probability of another RBA hike in the coming months, our key takeaway from the data was that it further defers RBA cuts, rather than necessarily implying another rate hike.

“As we’ve outlined here and in our Business Insights website since early 2023, we see relief via RBA rate cuts as a 2025 event, so we’re not surprised that markets (and most economists) are no longer pricing in cuts this year, but the market is now assigning around a 50 per cent probability to another hike which is a long bow to draw on a single monthly CPI read.

“Nevertheless, we have pushed back our first RBA cut from next February to May 2025, given the even slower progress for disinflation than hoped,” Mr Robertson said.

“Another source of uncertainty ahead is fiscal policy, with stage 3 tax cuts now underway, worth around $22 billion this financial year, and a range of ‘cost-of-living measures’ in Federal, State and Territory budgets worth close to $30 billion.

“How much of this money is spent versus saved will be crucial for imbalances between supply and demand, which will take time to become apparent.”

Mr Robertson noted the quarterly inflation figure due at the end of this month would provide more insight than the May figures alone and noted that inflation had generally been falling around the world, leading to rate cuts in both Europe and Canada. He said the RBA would consider a broad range of data (including recent weak GDP numbers) in reaching their decision and would not lose sight of its dual mandate of price stability and full employment.

“This means upcoming jobs data will be almost as influential as inflation data,” Mr Robertson said.

“The next labour force report out on July 18 will be important for policy settings. Our expectation is the unemployment rate moving gradually higher, but the RBA remain data dependent, so any surprises with this or from the quarterly CPI data later in July will be closely scrutinised.

“Beyond speculation on interest rates, economic conditions remain uneven and in some respects contradictory,” Mr Robertson said.

“We’re seeing record highs for property prices, stock markets and levels of employment, but we remain in a per-capita recession and consumer sentiment is lower than it was in the pandemic or the GFC, so with household budgets stretched tax cuts are arriving at the right time.

Our forecasts for the new financial year still show moderating inflation, helped by base effects and a firmer Australian Dollar (as other central banks cut interest rates while the RBA remain on hold) and more moderate gains for house prices.

“But economic uncertainty here and geopolitical risks overseas remain a drag on confidence, so the rebound will likely be in small steps,” Mr Robertson concluded.

To watch David Robertson’s July Economic Update, please follow this link: July Economic Update video.

David Robertson

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