The Reserve Bank of Australia has slashed official interest rates three times already this year, but high consumer confidence and inflation which is once again on the up have cast doubts over the speed at which further cuts will arrive.
AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver, in his weekly market update, notes that Australian inflation surprised on the upside in August, heading back to 3%, "its highest since July last year".
Dr Oliver said a good quarter or so of this gain was due to various electricity price rebates at the state level dropping out of the equation, but otherwise spending was still quite strong.
More concerningly though strong gains in a range of components including restaurant and takeaway meals, various services and stickiness or maybe even upwards pressure in new dwelling prices and rents raise the prospect that trimmed mean or underlying inflation for this quarter will come in around 0.8-0.9% quarter on quarter or so resulting in an annual rate of 2.7-2.8% year on year, which would be well above the RBA's forecast for around 2.5%.
Dr Oliver said the potential "stickiness" of inflation at higher than desirable levels had led to concerns the RBA "may not be able to cut much more if at all''.
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Predictions being wound back
Dr Oliver said money market expectations for RBA rate cuts this year had bounced around a lot and while they had lately been wound back, "the next shock may see them raised again''.
He notes that economic growth remains fragile, and there were risks to the upside for unemployment growth.
On balance we still expect the RBA to cut rates further but have wound our expectations back to two more cuts rather than three and now see the cash rate bottoming at 3.1% next year rather than 2.85%. At its meeting on Tuesday, we continue to expect the RBA to leave the cash rate on hold consistent with its 'gradual' approach to easing the cash rate.
Dr Oliver said RBA Governor Michele Bullock would likely indicate that the RBA board would wait for the November meeting to make any decisions, by which time they will have been given the September quarter inflation data.
The RBA cut the official cash rate by 25 basis points in February this year, followed by cuts of the same magnitude in May and August.
