Interest Rate Hikes Unlikely as Inflation Expected to Drop: Westpac

Westpac's senior economist, Justin Smirk, has expressed skepticism regarding speculation of impending interest rate hikes.

He predicts that the base effects in the often unpredictable monthly CPI (Consumer Price Index) indicator will probably reduce annual inflation to 3.6% before the next Reserve Bank of Australia (RBA) board meeting in early August.

Smirk noted, "We forecast that the June Monthly CPI Indicator will show a 0.3% increase for the month, causing the annual rate to decline to 3.6%."

Further insights from Smirk include the June quarter CPI forecast which anticipates a 1.0% quarterly increase and an annual rise of 3.8%. Meanwhile, the Trimmed Mean CPI, which filters out the most volatile price movements, is expected to be 0.9% for the quarter and 4.0% annually.

"By the end of 2024, we project the CPI to ease further to 2.9% annually, influenced by various cost of living measures," added Smirk.

The RBA's attention, according to Smirk, will likely be on the Trimmed Mean CPI because it mitigates most of the unusual fluctuations in cost of living metrics: "Trimmed Mean inflation will reduce to a pace of 3.5% annually by the end of 2024 and 2.8% annually by the end of 2025, signaling a continued moderation in inflation."

In the Minutes released from June’s RBA Board meeting, it was stated that there wasn’t sufficient evidence to alter the Bank’s stance on inflation. Although there were some surprises with the May CPI figures, wage growth appears to have plateaued, risks in the labor market appear biased downwards, and there's significant doubt regarding consumer strength.

Notably, the RBA's comments about the weakening labor market stood out: "The reduction in vacancy rates might suggest that labor market conditions are already weaker than employment trends indicate. Furthermore, the unemployment rate could increase rapidly once it begins to rise, as observed in the past."

Considering the RBA's dual objectives of price stability and full employment, concerns about the labor market shift the probability away from rate hikes.

The results of the June labor force report and the first-quarter CPI data will be crucial in determining not only the potential August rate increase but also the timing of possibly starting a rate cut cycle.

Should the unemployment rate fall lower or if the quarterly Trimmed Mean CPI exceeds 1.0%, it could challenge the RBA's current outlook.

Both Westpac and CBA predict the second quarter's Trimmed Mean CPI will be around 0.9%, which suggests that rates may remain unchanged.

Published:Wednesday, 3rd Jul 2024
Source: Paige Estritori

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