While the Reserve Bank (RBA) is due to announce its latest rate decision today, economists agree that a rate hold is an almost certain outcome with the central bank expected to maintain its hawkish tone in response to the most recent economic data.
But while most predict the RBA is due to soon commence a cutting cycle – although consensus has not been reached on the timing – Judo Bank’s chief economic adviser, Warren Hogan, believes the central bank could have two more hikes under its belt.
Speaking to InvestorDaily, Hogan predicted an increase of 25 basis points in November and an additional 15 basis points in December, potentially bringing rates to 4.75 per cent as 2025 approaches.
While he is not certain in his forecast, Hogan said: “I think it still is more likely than not the RBA will have to hike rates”.
“I’m more than happy to pull that forecast if I can see progress being made on inflation,” he said.
As a macroeconomist, Hogan believes that evidence is “starting to build” that the RBA’s efforts to curb inflation are not yielding the desired results. Among this evidence, he said, are rising housing prices, still “booming” employment, and resilient demand for credit.
The issue, he said, is that Australia’s macroeconomic policy has diverged sharply from global trends, which are traditionally characterised by synchronised movements.
“It’s becoming more probable that trying a different strategy [to the rest of the world] is not working – maybe we should have taken our cash rate above 5 per cent last year, now we’d be thinking about rate cuts,” Hogan said, adding that interest rates are not the biggest threat, it’s the persistently stubborn inflation.
He believes Australia still has a shot at a soft landing, but this hinges on preventing any resurgence in inflation.
“Higher rates are needed to get us on the right path,” Hogan said.
“It’s our best chance of staying out of recession,” he said, adding that Australia would enter a sure recession if inflation picks up again and forces the RBA to implement a series of hikes in 2025.
Reflecting on Australia’s recent GDP print which indicated an economy bolstered by public spending with a public sector recession, Hogan said the data illustrated how the “government is squeezing out the private sector”.
“We’re seeing that on the ground every day,” he said. “The government is pushing the private sector out. If the government wasn’t doing this, I’d argue that private sector activity would be higher.
“Of course, it’s the private sector activity, particularly investment, that’s going to expand the capacity of the economy in the future. So it’s a double whammy – not only is the government squeezing out private activity now, but it’s actually compromising our future activity.”
Hogan believes the central bank, despite outside pressures, understands the gravity of the situation and is poised to act independently to safeguard the economy.
“It’s an extraordinarily complex macroeconomic situation, it’s like nothing we’ve seen for 50 or 60 years, and that’s why economists are struggling to wrap their head around it,” he said.
“The RBA understands it, it’s why they’re sounding so hawkish, as people would say, because they’ve got their finger on the trigger of a rate hike. It’s the broader commentary, the government, and other vested interests that don’t want to see rates go up that are making it hard for them.
“But my view is that they are independent and of course they have expertise that others don’t and they’ll do the right thing eventually. Because they know that if they don’t do it, they’ll jeopardise our future and I don’t think they’re prepared to do that.”
The RBA has so far signalled that there will be no rate cuts this year. However, despite its forward guidance, some of Australia’s biggest banks, including the Commonwealth Bank, are still predicting cuts by the close of 2024.
Commenting on this, Hogan said he has “no idea” why some of the country’s most respected banks are not heeding the RBA’s words.
“I’ve worked as a chief economist at a major bank, and I’ve been doing this in this country for 30 years, and I have no idea why the biggest and most respected and well-performing bank in the country has economists calling for rate cuts with inflation well above target, unemployment is at 50-year lows … I really don’t understand why that is the case,” he said.
“The big bank profits are 1.5 per cent of GDP … There is no desperation in our banking system, so why do they think we need rate cuts?”
Ultimately, Hogan believes taking rates higher will result in a “better world economy next year” than otherwise would have been possible.
The RBA is scheduled to make its September rate call at 2:30pm today, with two more meetings left in 2024.
