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Bendigo Bank’s May Economic Update

13 May 2024 |Announcements
Stubborn inflation forces economists to rethink rate cuts as Federal Budget looms.

Australians hoping for an interest rate cut this year may be setting themselves up for disappointment with persistent inflation and strong jobs data all but confirming 4.35% is here to stay until 2025.

“While the RBA kept rates on hold again in May as expected, markets have been rethinking their timeline for when the easing cycle might start and had even started to partially price in another hike,” Mr Robertson said today.

“Our view for over a year has been that RBA rate cuts will start in 2025 to help support the slowing economy, but not in 2024 because of how difficult it is to eradicate inflation.

“With the market now coming to the same conclusion, the first cut is now predicted for early to mid-2025. While the possibility of another hike is always there, and similarly the US are also taking longer to start their easing cycle, we still favour no move up or down from the RBA this year.

“More strong jobs data, with our unemployment rate still in the high threes and stubborn core inflation encouraged a few market economists to predict fresh RBA hikes, but much weaker retail sales numbers were a reminder households are doing it tough, and are cutting back on discretionary spending.”

Mr Robertson said the turning point between tightening and easing cycles is always the toughest to forecast, for economists and for central banks alike.

“The timing of the first cut is at the mercy of the data, and economic data in this period is generally all over the shop, but we’re still expecting very slow economic growth and domestic demand ahead, with the main bright spots coming from international tourists and students, and strong public investment,” Mr Robertson said.

“Headline CPI fell to 3.6% in the latest numbers for the first quarter, but the core read was 0.2% higher than hoped at 4%, with rents and services inflation remaining the problem. Goods inflation continues to moderate, although it may be challenged by higher energy prices and geopolitical strains in the coming months.

“The latest RBA Statement on Monetary Policy now forecasts core inflation to still be well above target at year-end. Still, base effects should start to help by early next year. Meanwhile European rate cuts are already underway with the Swedish central bank cutting rates last week, and the European Central Bank expected to do the same next month, ahead of the Bank of England. The US Federal Reserve are now favoured to start cutting rates around September.

“Here, we remain around six months behind most of these cycles and this ‘higher for longer’ narrative has helped push the Aussie Dollar higher, especially against the Japanese Yen now above 100 for the first time in a decade. The Aussie has also been gaining on most cross rates, but against the US dollar it will be a tougher climb, likely to be influenced by interest rate differentials, commodity prices and the November presidential election.

“And lastly, the Federal Budget this week is likely to reveal a modest surplus helped by firm commodities and strong labour markets, offset to a degree by the stage three tax cuts and other cost of living support - but all with a fairly modest impact on inflation,” Mr Robertson concluded.

Watch David Robertson’s May Economic Update

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