PHOTO: Economists cite concerns about high inflation in the services industry and the strength of the job market as primary reasons for the potential delay in interest rate cuts.
In concerning news for Australians grappling with the cost of living crisis, some economists are cautioning that interest rates are unlikely to decrease until 2025.
Bond markets, which predict future interest rates, are indicating that interest rate cuts may no longer be in the plans for 2024. This perspective is shared by a former senior economist at the Reserve Bank of Australia (RBA), Jonathan Kearns, who currently serves as the Chief Economist at Challenger. Kearns, who held the position of head of domestic markets at the RBA until March this year, has stated that he anticipates interest rates will not see a decline until 2025.
Kearns further explained that Australia is now entering a phase of “a long plateau instead of a peak in rates,” suggesting that any movement in the next 12 months is more likely to be an increase rather than a decrease. However, it’s important to note that not all economists share this view. Out of 42 economists surveyed by The Australian Financial Review, only five predict that rate cuts will be ruled out for 2024.
Nevertheless, among economists who still anticipate interest rate cuts in 2024, the timeline for the first cut is slowly extending. Last year, the midpoint estimate for when economists thought rates might start to fall was February 2024, which then shifted to May 2024. Currently, it stands at August 2024.
Economists cite concerns about high inflation in the services industry and the strength of the job market as primary reasons for the potential delay in interest rate cuts. Data from the Australian Bureau of Statistics (ABS) revealed that in August, the consumer price index increased for the first time since May, primarily due to rising petrol prices and rents, resulting in an overall price increase of 5.2 percent, compared to a 4.9 percent rise in July.
However, the Reserve Bank of Australia focuses on ‘core inflation,’ which excludes volatile items like petrol and fresh produce. According to this measure, inflation in August was 5.5 percent, down from 5.8 percent in July. Kearns highlighted concerns regarding increasing rents, elevated electricity prices, the impact of high oil prices on petrol costs, and the pace of wage growth as factors contributing to the ongoing inflation challenge that is affecting the interest rate outlook.
Particularly, wage growth without corresponding increases in productivity could lead to sustained higher inflation. Kearns noted that the timing gap between wage growth and its reflection in inflation makes it challenging to predict its impact. However, the recent slight increase in the unemployment rate is expected to alleviate some of the pressure on wages.
SOURCE: NEWS.COM.AU