Lower-than-expected inflation may convince the central bank to hold back, analysts say
The Reserve Bank will likely “position for a pause” in interest rate hikes if Wednesday’s release of December-quarter CPI figures shows that inflation didn’t rise as much as the central bank expects, according to a forecast from UBS.
Economists predict the quarterly change in the CPI to slow to 1.6% from 1.8%, according to a report by The Australian. The annual inflation rate is expected to rise from 7.3% to 7.6%.
That would be Australia’s highest inflation rate since 1990, but still significantly lower than the RBA’s prediction of 8% for the December quarter, The Australian reported.
UBS predicted that a lower-than-expected CPI, along with weakening in December employment data and a continued slowdown in the pace of US rate hikes, will spur the RBA to lower its inflation predictions and stop hiking interest rates from next month.
A smaller-than-expected rate hike in February – or a pause in rate rises – would be a relief for mortgage borrowers who saw rates increase eight consecutive times last year, rising from 0.1% to 3.1%.
“The RBA’s [inflation] profile is well above consensus and our view,” UBS Australia chief economist George Tharenou told The Australian. “Such a large downgrade would likely see the RBA project a return of CPI to their 2-3% on-year target, and allow them to position for a pause of rate hikes ahead.”
The central bank’s most recent inflation forecasts predicted that inflation would reach 8% in the December quarter and remain at 3.2% – above the RBA’s target band – at the end of next year.
Tharenou agrees with the consensus view that the RBA will hike rates another 25 basis points to 3.35% at its meeting next week, The Australian reported. But while most economists predict a further hike to see the rate peak at 3.6%, Tharenou predicts that the rate will peak at 3.35%, barring another spike in minimum and award wages this year.
“We’re looking for their statement to soften the ‘tightening bias,’ to something like ‘The board expects an increase in interest rates may still be necessary over the period ahead, but the lower CPI outlook provides scope to consider a period of steady rates,’” Tharenou told The Australian.
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Commonwealth Bank also expected the annual rate of inflation to be lower than the RBA’s prediction, and forecast that inflation pressures would “abate relatively swiftly in 2023.”
“We expect this data to show that inflation pressures remained very strong over the December quarter, albeit we think the headline data will not be as strong as the RBA’s implied profile,” Gareth Aird, CBA head of Australian economics, told The Australian.
While Aird expects another 25-basis-point hike at next week’s RBA meeting, he said “it is not a done deal, particularly as the RBA has indicated they are willing to pause in the tightening cycle.”
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