Australia Likely to Lift Official Interest Rate to 4.6 Percent, Deutsche Bank Predicts

A man walks past the Reserve Bank of Australia sign in Sydney, Australia, on Sep. 6, 2016. William West/AFP via Getty Images

One of the largest banks in Europe is predicting Australia’s official cash rate to rise significantly in the next two months.

Following the latest monthly inflation figures, a number of financial institutions and economists have revised their forecasts for the cash rate due to increasing uncertainty in the Australian economy’s ability to rein inflation.

The monthly consumer price index (CPI) climbed by 4 percent in the year to May 2024, marking the third consecutive increase from 3.4 percent in February.

Annual trimmed mean inflation also rose from 4.1 percent in April to 4.4 percent in May.

As the monthly CPI continues to go up, financial markets are concerned that the Reserve Bank of Australia (RBA) will lift the cash rate in the upcoming months to curb inflation growth.

During its June board meeting, the RBA kept the official cash rate at 4.35 percent.

While the rate has remained unchanged since November 2023, the central bank has said it would not rule out further interest rate increases to bring inflation down to the two to three percent target range.

Under the new inflation development, Deutsche Bank Chief Economist Phil O'Donoghue predicted that the official cash rate would rise to 4.6 percent in August.

“Underlying inflation is intolerably high in Australia. In fact, Australia is the only G10 country where underlying inflation has increased since December,” he said.

Deutsche Bank’s data shows Australia’s core inflation has grown by around 0.4 percent since December 2023, compared to a nearly 0.2 percent drop in New Zealand.

Meanwhile, the UK recorded the most significant fall in core inflation at around 1.7 percent, followed by Sweden and Japan at slightly above 1.5 percent.

Other Forecasts

ANZ Bank senior economist Catherine Birch said Australia may be experiencing a temporary stall in the disinflation process, similar to what the United States underwent earlier in 2024.

However, she noted that the May CPI might cause the RBA to be “a little nervous” and raise the risk that the June quarter CPI would exceed the RBA’s forecasts of annual growth of 3.8 percent for headline and trimmed mean inflation.

“If this occurred alongside upward revisions to the RBA’s expectations for activity and labour market data, the RBA could lift the cash rate,” she said.

Despite this, Ms. Birch did not expect the rate to climb in the coming period.

It is worth noting that prior to the release of the May inflation results, ANZ economists forecasted in March that the RBA would likely reduce the cash rate from this November.

Meanwhile, AMP economist Shane Oliver believed the risk of another interest rate hike had gone up with the significant increase in trimmed mean inflation.

“While the CPI is on track for RBA’s second quarter forecast of 3.8 percent, the trimmed mean is at high risk of coming in above its 4 percent forecast, so the risk of another rate hike has now risen to around 40 percent,” he said.

Mr. Oliver also noted that June quarter inflation data will be the key to whether the RBA would lift the official cash rate.