The market took a bit of a tumble last week amid concerns that inflation is proving harder to tame than expected.
This followed the release of the consumer price index (CPI) data for the March quarter.
The market had been anticipating a 0.8% increase in CPI, but the Australia Bureau of Statistics revealed a slightly higher reading of 1%. This means that CPI is up 3.6% on an annual basis, which is comfortably above the Reserve Bank of Australia's target range of 2% to 3%.
But what does this mean for interest rates? Will borrowers have any relief in 2024? Let's see what impact this inflation reading has had on expectations.
Are interest rates off the table in 2024?
According to the ASX 30 day interbank cash rate futures for May, there is now zero probability of a rate cut at next month's meeting. And looking further ahead, cash rate futures suggest that a rate cut is unlikely until March or April 2025.
Not everyone agrees.
The economics team at Westpac Banking Corp (ASX: WBC) has been more dovish on interest rates recently. And while it has changed its tune slightly on timing, it still believes a rate cut will be coming this year.
In response to last week's inflation data, Westpac's chief economist, Luci Ellis, said:
Given the slower progress on disinflation this quarter and the lower starting point for labour market slack, we now expect the first rate cut to occur after the November meeting, rather than September as previously expected. As always, this view is data-dependent and there are risks on both sides of a November timing.
Could rates rise?
Borrowers may be aghast to learn that one leading economist believes that rate hikes are on the cards.
The chief economist of Judo Capital Holdings Ltd (ASX: JDO), Warren Hogan, believes that the Reserve Bank of Australia could increase rates not once, not twice, but three times before the end of the year.
And while it would be easy to dismiss Hogan's predictions as hyperbole, he's very serious and has a strong track record of cash rate predictions.
In fact, Mr Hogan was the nation's top economic forecaster in 2023 according to the Australian Financial Review's rankings. He was the only economist out of 29 surveyed to predict that the central bank would raise the cash rate five times last year to 4.35%.
Hogan told that media outlet that he sees rates increasing to 5.1% because the Reserve Bank's current strategy just isn't working. He said:
The RBA's strategy this cycle doesn't seem to be working. They were hoping we could do less than the rest of the world because we were more exposed to the nominal channel of monetary policy through variable rate mortgages … We just need to now get up to the [cash rate] level that other countries are, at 5 per cent.
This consumer-led slowdown needed to then trigger a business slowdown. Business needed to start pulling back on hiring, and they needed to start pulling back on investment through a profit squeeze. But that doesn't seem to be happening.
