Economist issues dire RBA interest rate hike warning: 'Back in play'
A top economist has warned Aussie mortgage holders to prepare themselves for interest rate hikes. The Reserve Bank of Australia (RBA) is expected to cut the cash rate tomorrow, but it could be the last rate cut for 'some time'.
The central bank cut the cash rate by 25 basis points to 4.10 per cent in February, marking the first cut in more than four years. Judo Bank chief economic advisor Warren Hogan told Yahoo Finance at the time that it was still too early for a cut and the board risked driving up inflation.
Now the EQ Economics managing director is warning that the 'window for interest rate cuts is closing'. He expects the RBA will likely announce a 25 basis point cut this week, with the case for a supersized 50 basis point cut dissipating over the last two weeks.
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'We will probably get one this week but in the absence of a tariff-induced global shock, we are unlikely to see any more cuts after that,' Hogan wrote in an opinion piece for The Australian Financial Review.
'Indeed, the natural rhythm of the economic cycle suggests rate increases could be back in play before too long.'
All of the Big Four banks are expecting an interest rate cut tomorrow, with NAB forecasting a jumbo 50 basis point cut.Markets are expecting a 25 basis point rate cut as a 'done deal', which would take the cash rate below 4 per cent to 3.85 per cent.
Markets expect a further one or two rate cuts over the rest of the year, which would take the cash rate down to around 3.5 per cent.
Hogan said this seemed like a 'reasonable expectation', given the RBA's message after the February board meeting, which implied it could bring the cash rate down to a neutral level, around 3.5 per cent, if all goes well.
But he said there were factors standing in the way of more interest rate cuts.
'With underlying inflation still running at the top of the target band and the private economy showing signs of gradual recovery in late 2024 and early 2025, there is no strong case to take policy into a genuinely stimulatory stance,' he said.
Underlying inflation, the RBA's preferred measure, increased by 0.7 per cent, with the annual rate easing to 2.9 per cent, within the RBA's 2 to 3 per cent target band.
Hogan noted the RBA now waited until there was 'hard evidence' in the economic data that monetary policy needed to change, and was taking 'transparent but late' policy action.
He said this means Aussie will have to wait until later this year to see if the RBA will be forced to move to montetary policy tightening, in other words, interest rate hikes.
The unemployment rate remained steady at 4.1 per cent for April, but 89,000 more Australians were in jobs than the month before. This was higher than the 20,000 economists had expected.
VanEck head of investments Russel Chesler said the unemployment rate was like a "boulder" lodged in the economy's path and could be a factor standing in the way of more cuts.
"It has barely moved in three years, even throughout the RBA's tightening cycle, and this has contributed to the stickiness of services inflation," he said.
'With continuing low unemployment rate and wage growth having accelerated to 3.4 per cent, further falls in inflation will be limited – there is actually a risk of inflation increasing.'The latest data shows inflation is within the RBA's target range, but it won't take much to push it back up past the 3 per cent mark.'
Chesler thinks a 25 basis point cut on Tuesday is the 'most likely outcome' but doesn't think it is 'strictly necessary based on current macro conditions, including the tight labour market, resilient retail sales and rebound in house prices'.
'For further cuts to occur this year we will need to see a change in the economic landscape, particularly on the employment front,' said Chesler.
The majority of experts surveyed by Finder this month expect a cash rate cut on Tuesday.
Three in four experts forecast two or more cuts in the next 12 months, with 56 per cent predicting cuts in July and August.
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