Bendigo Bank’s November Economic Update
With the widely anticipated Melbourne Cup Day interest rate increase now behind us, Australians should prepare for the higher rates to stay in 2024.
Bendigo and Adelaide Bank’s Chief Economist, David Robertson said in his November Economic Update that while back-to-back increases at the December meeting are not expected, the risk of further rises in 2024 is real.
“The Cup Day rate increase was well anticipated after the recent CPI data, where core inflation accelerated to 1.2% for the third quarter alone, as well as a range of other factors all pointing to an even slower return to the RBA target,” Mr Robertson said.
“Our view since the July pause in rate hikes has centred both on the likelihood of tighter RBA policy by year end due to stubbornly high services inflation and the view that rate cuts would more likely be a 2025 event.
“Recent CPI data added to this likely scenario as both goods and services prices were firmer than expected, showing demand is proving less responsive to higher interest rates than the RBA had hoped.
“In contrast to other comparable central banks, who started their tightening cycles earlier than the RBA (and are now on hold), Australia’s official cash rate is back on the ascent, although a back-to-back hike in December is most unlikely.
“With the RBA statement on Tuesday noting the painful squeeze on household finances, and the longer than usual lag in this tightening cycle impacting prices, they remain ‘resolute’ in dealing with inflation,” Mr Robertson said.
“History shows us how difficult it is to dowse the flames of inflation, amid high global energy prices, but history also shows us how damaging rampant inflation is, so the RBA is right to prioritise this imperative.
“When core inflation is back on target then rates can fall back to more neutral levels, however one key challenge at present is tight labour markets,” Mr Robertson said.
“Having a 3.6% unemployment rate is a two-edged sword. On one hand, strong demand for labour is supporting the cost-of-living crisis, however the unique nature of the post-pandemic economy means a more resilient jobs market in Australia makes the RBA’s job of dealing with inflation even more challenging.
Mr Robertson said that while other countries have started to see tightness in their labour markets recede, it wasn’t evident in Australia.
“The RBA Statement on Monetary Policy out later this week will show their latest forecast for jobs, inflation and economic growth, and none of these are likely to indicate anything but a tightening bias for all of 2024,” Mr Robertson said.
“Another challenge for the RBA is the strength in household spending, despite the extent of rate hikes so far.
“The September retail sales data showed that household spending was up 5% year-on-year, and while that growth rate was over 9% for non-discretionary items, even discretionary spending was slightly higher than a year ago. While non-discretionary spending was sharply higher for transport, healthcare and food, there were also increases for discretionary items such as recreation, cafes, and accommodation.
“One of the questions for the RBA is the degree to which households are becoming accustomed to price increases so are motivated to buy in advance of higher costs ahead, in other words, inflation expectations.
“While we’re not expecting another rate hike next month, the risk of another increase in February or May (after the next quarterly CPI releases) is material, and while economic growth and the jobs market have remained resilient, it’s important to be realistic about the timing of any interest rate relief, and to budget accordingly,” Mr Roberson concluded.