With inflation in Australia picking up rather than slowing down, should S&P/ASX 200 Index (ASX: XJO) investors expect the Reserve Bank of Australia to raise interest rates?
ASX 200 investors were broadly caught off guard yesterday when the ABS released May's inflation print.
Economist consensus expectations were for May's figures to bring Australia's annualised inflation rate to 3.8%, up from April's 3.6%.
As you're likely aware, those forecasts proved to be rather optimistic.
Fuelled by ongoing outsized price increases in housing, transport and wages, May's inflation figures saw the monthly consumer price index (CPI) indicator leap to 4.0% in the 12 months to May on an annualised basis.
That saw a big uptick in the number of investors and analysts betting that the RBA will now be forced to raise interest rates at its next meeting in August. And it saw the ASX 200 close down 0.7%.
Indeed, the ASX 200 tumbled 0.6% immediately following the news to be down 1.1% before recovering some of those losses.
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What the RBA flagged on interest rates last week
At its last meeting on 18 June, the RBA opted to hold interest rates steady at 4.35%.
That's the highest cash rate we've had in Australia since late 2011. And it comes after the central bank has hiked rates 13 times since it began tightening in May 2022, when the official rate stood at 0.10%, to combat fast-rising inflation.
As for what ASX 200 investors can expect from the central bank next, here are some revealing takeaways from the RBA's last meeting.
According to the RBA board:
Returning inflation to target within a reasonable timeframe remains the Board's highest priority… The board needs to be confident that inflation is moving sustainably towards the target range…
The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out. The Board will rely upon the data and the evolving assessment of risks…
The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.
Clearly, then, the RBA is leaving the door wide open to either keep interest rates on hold or raise them if needed. The only option looking ever less likely in 2024, is a rate cut.
What are the experts saying?
Citi senior economist Faraz Syed pointed to a big uptick in investor expectations for another interest rate hike following the hotter-than-expected inflation print.
According to Syed (quoted by The Australian):
The market is currently pricing in over 50% chance of a hike in the next two meetings. We see this as fair and will re-assess our June quarter inflation forecast and our RBA view of no changes to the cash rate this year.
Russel Chesler, VanEck's head of investments and capital markets, also indicated that the RBA may now be forced to tighten to keep a lid on inflation.
Chesler said:
We weren't expecting the RBA to cut rates until the second half of 2025, but the hotter-than-expected CPI print … indicates this could be even further away. Worse, with inflation proving to be stubbornly resistant, the probability of the next rate move being up has increased.
Indeed, according to Deutsche Bank, ASX 200 investors should expect the RBA to boost interest rates by 0.25% in August, bringing the official cash rate to 4.60%.
According to Deutsche Bank's Australian chief economist, Phil Odonaghoe:
Underlying inflation is intolerably high in Australia. In fact, Australia is the only G10 country where underlying inflation has increased since December…
Unless there is a stunning reversal in underlying inflation pressures in the month of June, we think that another material beat on the RBA's near-term forecasts for trimmed mean inflation is looking very likely. That should prompt a rate hike.
National Australia Bank Ltd (ASX: NAB) chief economist Alan Oster was also surprised by the hot-running inflation. NAB thinks this will lead to the RBA keeping rates on hold for longer, though the bank doesn't expect the RBA to hike.
NAB said:
We now expect the RBA to remain on hold for longer, with a first rate cut now unlikely until May 2025, previously November 2024. From there we see a steady profile of one cut per quarter back to 3.10%, now reaching that point in mid-2026.
