Signals from senior Reserve Bank officials this week that it will not tolerate higher-for-longer inflation has prompted Citi to push out its terminal forecast for the official cash rate.
The bank on Friday said it now expects back-to-back 25 basis-point increases when the central bank meets in September and November and adjusted its terminal rate forecast from 4.6 per cent to 4.85 per cent.
“This view is driven by a two-speed economy, where a deepening housing correction is offset by an AI-related investment boom that is adding to capacity constraints,” senior economist Faraz Syed said.
“Anemic productivity, a tight labour market, and elevated oil prices likely mean inflation will remain stubbornly high, with our Q3 trimmed-mean CPI forecast at one per cent.
“In our view, the RBA needs to hike further to get on the front foot of inflation, though a dovish Board could delay action.
“Consequently, we push our first rate cut forecast out to Q4 2027.”
The RBA is now almost universally expected to hike rates again after its deputy governor Andrew Hauser warned on Tuesday it would not tolerate inflation remaining above target for a prolonged period, prompting fears of an imminent recession.
The big four banks and most economists are expecting another increase either later this month or on Melbourne Cup day, with respected finance commentator Alan Kohler warning that could send Australia’s already fragile economy over the edge.
“What all this means is that if there’s a rate hike in September, as the market now thinks there will be, odds of about 72 per cent, then (it’s) very likely to be a recession because the sentiment is so negative,” Mr Kohler said.
“I think that if there’s a rate hike in September, later this month, and especially if there’s another one in November, I reckon we’re in for a recession.”
July’s annual headline inflation reading came in at 3.5 per cent, still well outside the RBA’s 2 to 3 per cent target and the 12th-straight month of inflation above the preferred range.
It is not expecting it to get back within the band until June next year.
“A consequence of that is that inflation has been above target for a long period of time and at some point, we will have to say that is long enough,” Mr Hauser told the ABC’s 7.30 program on Tuesday night.
“So, the reason for taking time is not over the horizon, but it’s long, I do agree.”
One more interest rate rise would take the cash rate to a 15-year high of 4.6 per cent but another on top of that would take it to 4.85 per cent, which would be the highest level since the global financial crisis in 2008.
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