Inflation outlook: More rate hikes on the cards as 'greedflation' persists

FOR ADVISERS ONLY

While the Reserve Bank of Australia (RBA) opted to put interest rates on hold at its July and August meetings, ClearView Chief Investment Officer Angus Sippe believes further rate hikes could be likely in coming months.

In a recent CIO Insights webinar, Mr Sippe said contrary to popular belief earlier in 2023, the RBA’s rate hike cycle would likely now “go higher and a lot longer”.

“Most people in the media have talked about the RBA finishing their rate hike cycle, but you can see it’s likely expected to go higher now – we are looking at rate cuts not until the end of the year, if not further [in the future]”, Mr Sippe said.

“We’re not expecting policy to be more stimulatory in as quick a fashion, and that may lead to more stress for consumers and the economy.”

Mr Sippe believes the local economy was potentially trapped in a cycle of rate hikes causing responses from both the private sector and government which could in turn lead to more rate hikes.

“Corporate Australia in response to rate hikes would likely continue to raise prices in a bid to keep their margin, but as margin increases so do wage pressures, which then likely leads to further inflation and more rate hikes,” he said.

“On the government policy side, to offset wage increases, usually their solution is to increase immigration, which can increase consumption demand and also lead to higher house prices. This then has the circulatory effect of being inflationary and could lead to more rate hikes. It’s a bit of a self-fulfilling cycle until something breaks in that system.”

Mr Sippe said economic data indicated that “greedflation” was likely playing a role in keeping prices high, with retail and other large corporations having increased their margins in the post-COVID period.

“While everyone talks about bottlenecks in supply chains, raw materials, wage pressures leading to inflation, the simple fact is that corporate profits in this inflationary environment have been historically very high if not at records,” he said.

“Coles and Woolworths have increased margins by 2.5 per cent over the last couple of years. This is where this name of greedflation is coming from - it’s where the corporate world is taking more of the pie to the detriment of the consumer, so it’s not wages that are driving prices higher.”

While both the property and equities markets remained buoyant in the face of continuing rate hikes, Mr Sippe said a downturn was expected once “the market realises central bankers are going to stay true to their word”.

“Our base case is still recessionary, moving more probably to a hard landing which has negative connotations for growth assets but positive for fixed income,” he said.

“It’s a phenomenon we’ve seen across the world with house prices peaking and then the subsequent drawdown. In Australia we are the outlier where house prices have started to pick up again. But what Governor Lowe said in his speech post the last rate hike is that they are surprised by house price increases and they will continue to hike until they see those numbers soften.”