January’s CPI data has indicated that inflation is falling faster than the Reserve Bank expects, after it came in weaker than expected, managing to hold at 3.4 per cent year-on-year.
In his weekly market commentary, AMP’s chief economist Shane Oliver said that even with a likely bounce in inflation to around 3.7 per cent, inflation looks on track to come in just below the RBA’s March quarter forecast for 3.5 per cent year-on-year.
Dr Oliver, who had previously voiced concerns about the RBA potentially “going too far”, acknowledged that while it’s still early to confirm, there is a growing sense that the RBA’s November rate hike might have been an overreaction to the less favourable inflation data from the September quarter.
“Of course, it may become more of an issue in the week ahead as December quarter GDP growth looks like being very weak at 0.1 per cent qoq with an ongoing per capita recession and a high risk of a contraction in GDP,” he said.
“Our Australian pipeline inflation indicator continues to point to a further fall ahead and we see inflation this year falling to just below 3 per cent 12 months ahead of the RBA’s forecasts.”
This month, the RBA is not due to meet until 19 March, after it cut the frequency of meetings from 11 to eight in line with the RBA review’s recommendations.
Weighing in on the ongoing “too high for too long” debate, Anneke Thompson, chief economist, CreditorWatch, said that the local central bank is “highly unlikely” to ease monetary policy prior to the US and UK markets.
“Any shift in expectations of rate cuts overseas does impact the timing of rate cuts locally,” said Thompson.
She opined that monetary policy measures the RBA has taken to date are now working well to bring down inflation.
“Coupled with retail sales that were flat in trend terms over January 2024 and rising unemployment, which now sits at 4.1 per cent seasonally adjusted, it is likely we are at the peak of this cash rate cycle. Incoming data over the next few months, particularly covering monthly inflation and labour force, will be closely monitored by the RBA for signs of further weakness in the economy,” Thompson said.
She added that if the unemployment rate rises more than anticipated – and the RBA currently expects the rate to be 4.2 per cent by June 2024, only 0.1 per cent higher than it already is – this will add to the case to ease monetary policy sooner rather than later.
Last month, Deutsche Bank said in its most recent research paper that the RBA’s most recent inflation outlook “looks too conservative”.
The financial institution’s chief economist for Australia, Phil O’Donaghoe, believes the RBA is exercising too much caution despite recent history suggesting that inflation could actually drop “much more quickly” than the bank anticipates.
“That would mean RBA should be cutting more and earlier, rather than less and later,” O’Donaghoe told InvestorDaily at the time.
Looking back at “one of the RBA’s biggest near-term forecast misses on record” – the bank’s prediction that inflation would rise by half a percentage point to June 2022 versus its actual 2.25 percentage point lift – the economist said the central bank’s forecast needs to be “more adaptive to hard data points”.
The key question now, he opined, is whether the same lesson is about to be learned again, only this time in the other direction.
“Time will tell, meaning upcoming data points are crucial. But history suggests the RBA’s latest forecasts are at risk of proving too conservative,” said O’Donaghoe.
The RBA doesn’t expect inflation to reduce to its target range until the end of next year.
