A leading economist and strategist expects the Reserve Bank of Australia will resume its rate-hiking cycle at its next meeting, despite forecasting softer inflation figures to be released today.
The Australian Bureau of Statistics will release its March quarterly inflation data at 11:30am AEST, after the monthly consumer price index for February fell for the second month in a row to 6.8 per cent, down from a peak of 8.4 per cent in December 2022.
The rate of inflation is a key piece of economic data taken into consideration by the RBA when deciding whether to lift interest rates or continue with a pause at its next meeting.
Last month the RBA voted to leave rates unchanged at 3.6 per cent, making it the first pause since it began its rate-hike cycle in May 2022 to tackle rising inflation.
Data from the December 2022 quarter showed the Consumer Price Index (CPI) reached 7.8 per cent annually — the highest level since March 1990.
The RBA has an inflation target between 2 and 3 per cent, which an independent review of the central bank said should remain in place.
But global strategist at Rabobank, Michael Every, told The Business he believes the RBA had so far done a "terrible" job trying to bring inflation under control.
"CPI is still going to be between 6 or 7 per cent, and it doesn't seem like it's going to come down quickly," he said.
"The RBA itself is one of the slowest in terms of when it thinks it will bring it [CPI] down.
"So I think [inflation]'s going to be sticky for a good long while yet."
Mr Every said he thought it was too early for the RBA to pause its current rate-hiking cycle at last month's meeting, and it was done to appease mortgage holders struggling with the cost of living.
"Obviously they [the RBA board] were doing that because of the housing market, even though they won't say so, but I think that was the wrong call for them to make and it does risk that they end up having to do even more further down the line," he said.
"That's the problem with holding back — you then have to give more later on."
Inflation data may see a return to rate hikes
Mr Every said future rate rises from the RBA were still on the table despite last month's pause, but it would depend on the March quarter inflation data.
"You could have a surprise on either side, it wouldn't completely shock me if you've got slightly softer numbers … which would be a big relief for [the RBA]," he said.
"But it doesn't mean you're going to get softer numbers in Q2, or Q3, or Q4, and that's where the problem lies. It's not a short-term thing, it's a structural, longer-term problem."
He believes the RBA will follow suit of other central banks around the world by realising it had paused on its aggressive rate hiking cycle earlier than it should have.
"Up until now, [other central banks were] mostly hiking and hiking and hiking, thinking about pausing, and then realising they'd paused too soon in most other places, and I think the RBA will be the same," he said.
RBA governor Philip Lowe appeared to share that mindset when speaking at the National Press Club earlier this month, saying the central bank's rate pause in April "does not imply that interest rate increases are over".
"We've got the highest inflation rate in 30 years, the lowest unemployment rate in 50 years, and still two years before we get inflation back to the top of the target range," Mr Lowe said.
"So I think it's too early, way too early, to be talking about interest rate cuts and the balance of risk lies to further rate rises."
But Mr Every acknowledged that there was a risk of rates being too high, which would cripple growth and grind the economy to a halt.
He echoed the stance put forward by European Central Bank president Christine Lagarde in a speech last week, and said further rate hikes would inevitably "blow up" parts of the economy, and there was "no way" for it to be avoided.
"But while rates are high for some parts of the economy, we are going to support basically printing money, other parts of the economy to make sure they do OK," Mr Every said.
"So say for example, the housing market might really be rocked, but we might build up a big defence supply chain network in Australia, again, employing hundreds of thousands of people, building ships, rockets, et cetera.
"Now, would you rather have housing or rockets? I'm not making that choice. But I am saying central banks might do both at the same time."
Could stagflation be on Australia's doorstep?
Mr Every said there was a risk of stagflation — when high inflation is coupled with slowing economic growth — affecting the Australian economy, based on recent data.
"Wherever you look, there are risks of not doing enough, and then we get high inflation, there are risks of doing too much, and then we crash and we have a recession and deflation," he said.
"And we have a risk of stagflation, where we have growth bumping along the bottom, and inflation just won't go down.
"That's one of the reasons again, why I think central banks need to think in a different way and admit we need much more liquidity in some areas where we're really short of stuff, and we need much less liquidity in other areas where all we've got is bubbles and too much stuff."
By "short of stuff", Mr Every pointed to Australia's lack of major manufacturing industries, such as cars, in favour of being primary producers.
"You still produce wonderful food and stuff that comes out of the ground, but you have very little value add in any area," he said.
"What you're seeing is every major economy around the world, even on the other side of the world, like Chile, basically saying we're going to nationalise our resources.
"Why does Australia sell iron ore to other countries rather than making steel with it?"
Mr Every said he sees a trend of "deglobalisation" emerging in the future, which means a shortening of supply chains, and trying to build resilience with multiple export and input options, and spare capacity.
"Nobody wants to be running 'just in time' facilities anymore. Everybody wants to be 'just in case', and in the worst case scenario ends up being 'just for me', so that you have stuff and other people don't.
"That does have a big economic impact going forward. It's certainly inflationary, for example."
Mr Every said it was "very unlikely" that the RBA's belief of inflation coming down slowly and the economy will recover in a couple of years.
"All the other nasty scenarios where you crash and have very, very low inflation, or they don't do enough, and we have persistently high inflation, and or stagflation, these are much, much more likely," he said.
"Maybe it's a coin toss between the two, it depends how you look at it. But the happy scenario, I'm not putting much money on there."
