The Commonwealth Bank is now warning Australian borrowers to brace for a possible rise in interest rates.
Australia’s largest home lender has changed its forecasts to make just one rate cut in 2024, instead of three as recently predicted.
But Gareth Aird, head of Australian economics at CBA, said a rate hike in coming months could not be ruled out as underlying inflation rates are still on the high side.
Another rate hike in 2024 would take cash rates to 4.6 percent, which would be the highest since November 2011, and contribute to the most aggressive rate hikes since 1989.
“The near-term risk is related to a rate hike,” he said.
‘But we expect the RBA to be suspended over the next six months as the per capita economy continues to contract, inflation is expected to fall further and the labor market is expected to ease.’
The Commonwealth Bank is now warning Australian borrowers to brace for a possible rise in interest rates
The Commonwealth Bank has adjusted its forecasts for the Reserve Bank of Australia to cut rates in November instead of September.
There is now only one rate cut for 2024, compared to a recent forecast of three cuts this year.
For 2024 and 2025, the CBA now predicts five interest rate cuts instead of six, which would bring the Reserve Bank interest rate back down to 3.1 percent instead of 2.85 percent.
“We are now seeing a longer and more conservative easing cycle than previously expected,” Aird said.
The 30-day interbank forward market now has the Reserve Bank pegging the cash rate at a 12-year high of 4.35 percent in 2024.
Bond market yields, or the annual amount investors get for holding government bonds, have also risen since Wednesday last week, suggesting financial markets are bracing for another possible rise in Australia.
Interest rates changed after the Australian Bureau of Statistics revealed headline inflation rose 3.6 percent in the March quarter, higher than market expectations of a 3.5 percent increase.
But the underlying inflation measures, which ignore large price increases and decreases, were particularly alarming.
CBA’s head of Australian economics Gareth Aird cannot rule out a rate hike as underlying inflation rates are still on the high side
According to the weighted median, which shows price increases in the middle of the range, inflation rose 4.4 percent.
The trimmed average, based on an average excluding volatile goods such as gasoline and vegetables, showed prices rose 4 percent.
This would worry the RBA, as in February it had expected this measure to fall to 3.6 percent by June 2024.
The unemployment rate of 3.8 percent is also well below the Reserve Bank’s forecast that it will rise to 4.2 percent by mid-year, fueling concerns that wages will drive up costs.
But Mr Aird said unemployment is still likely to rise as higher interest rates lead to cuts.
“Discretionary inflation is likely to fall further as Australian households continue to tighten their belts,” he said.
‘This will in turn loosen the labor market and remove wage pressure.
‘As wage growth declines, this will put downward pressure on cost inflation in the services sector, where wage growth is generally the dominant driver of price increases (note that dynamics do not apply to rents, which are considered a service). ‘
A record 548,800 net migrants moved to Australia in the year to September, which Aird said has fueled inflationary pressures by boosting demand for goods and services.
“The increase in Australia’s population over the past 18 months has been extraordinary,” he said.
‘The sharp increase in population growth has increased aggregate demand in the economy.
‘This in turn has somewhat masked the decline in per capita real consumer spending.
“More importantly, from a monetary policy perspective, there are implications for inflation.”