Bendigo Bank’s February Economic Update
While homeowners may have seen their last rate increase from the RBA for a while, patience will be a virtue when it comes to rate cut expectations, according to Bendigo Bank Chief Economist, David Robertson.
“The first RBA meeting for 2024 went to script with no change to interest rates, as forecast, and the messaging matched our expectations of no further rate hikes, but there will be a need for patience before the RBA can be expected to cut rates,” Mr Robertson said.
“This was the first policy meeting with the new format including a press conference, and Governor Michele Bullock spoke candidly about the need to remain vigilant on inflation. This should be interpreted mainly as a warning that rate cuts will be after inflation is tamed, not just on the hope that it might”.
“Having said that, there’s no doubt recent CPI data has been encouraging. Core inflation fell to 4.2% by year end, only 0.1% below our forecast but 0.3% below the RBA’s estimate. There has also been pleasing progress on goods price inflation - but we’re still expecting a slow path to the target range.
“We expect core inflation to be back at 3% by year-end, but before the RBA can cut rates, they’ll need to be convinced not only that we will dip below there, but that CPI will stay in the band.
Mr Robertson highlighted three factors that will challenge this path to the target:
- High services inflation is still elevated by tight labour markets and poor productivity levels.
- Geopolitical tensions around the world risk renewed supply chain disruptions, and
- The stage 3 tax cuts (while an important step in the urgent need for tax reform), will add fiscal stimulus while monetary policy is trying to constrain demand.
“So, while the market is pricing in rate cuts by September, we are still suggesting they are realistically more likely to start in early 2025,” Mr Roberston said.
“One of the challenges with forecasting last year was the much larger rise in net migration than expected, and this year that remains a source of uncertainty, especially for its impact on labour markets and property prices. The December jobs data showed unemployment still below 4%, which is one of the lowest amongst advanced economies, and while we are forecasting a rising unemployment rate, anything below 5% suggests a soft landing.
“Financial markets are also pricing in a soft landing in the US, partly due to strength in their labour markets - taking stock markets to a record high but keeping us guessing when the US Federal Reserve will start to cut their official rates, most likely in May.
“So, we start 2024 with equity prices at record highs, buoyed by the thought of soft landings, rate cuts ahead and an expected boom via Artificial Intelligence, as well as record highs in Australia for property prices - albeit mainly driven by population growth outpacing supply,” Mr Robertson said.
“For central banks, the combination of aggressive valuations together with resilient labour markets may see less urgency to cut rates even as inflation falls, but we will need to see how demand for jobs holds up as the economy slows, and how obediently inflation continues to fall.
“The next RBA decision isn’t until March 19 when rates will again be on hold, but ahead of that, the key data points will be, labour force numbers for January and the monthly CPI indicator out later this month.
“Market consensus is for benign inflation, a soft landing with low unemployment and rate cuts by September, but this narrow path will need a lot to go right to deliver cuts so soon,” Mr Robertson concluded.
To watch David Robertson’s February Economic Update, please follow this link: Bendigo Bank Economic Report.
