Economists says interest rates to remain higher for longer as inflation slows to 3.6pc in March

Economists say households will have to until potentially 2025 for any rate relief as insurance, education and rents rise at the fastest pace in more than a decade.

Economists expect interest rates to remain higher for longer after stronger-than-expected March quarter inflation data surprised financial markets, prompting traders to price out bets of an RBA cut this year.

Westpac has now shifted its forecast for an expected cut from September to November, bringing it into line with ANZ and National Australia Bank.

Former RBA assistant governor Luci Ellis, now Westpac chief economist, said inflation continued to unwind in the March quarter but not quite as much as expected.

The consumer price index rose 3.6 per cent in the 12 months to March 31, down from 4.1 per cent in the previous three months but higher than the 3.5 per cent the market had pencilled in.

“It is declining, but it has a way to go for the RBA to be confident of returning to the 2-3 per cent target range on the desired timetable,” Ms Ellis said.

“Given the slower progress on disinflation this quarter and the lower starting point for labour market slack, we now expect the first rate cut to occur after the (RBA’s) November meeting.”

CBA head of international economics Joseph Capurso said the Australian dollar jumped above US65.20c after the CPI figures were released with financial markets now only pricing in a small chance – about 4 per cent – of a rate hike by August, while pricing out almost any bet of a rate cut this year.

Westpac chief economist Luci Ellis now expects rate cuts to occur from November. Picture: Jane Dempster/The Australian.

The benchmark S&P/ASX 200 index trimmed an earlier 0.5 per cent intraday gain to close flat at 76983 points.

“Interest rate markets are now pricing only a small chance of a sole 25 basis point rate cut by the end of the year,” Mr Capurso said.

Commonwealth Bank is now the only big four bank economic team expecting the first cash rate cut to come earlier in the year in September but acknowledge that the risk lies with it coming the following month.

Investment bank UBS has pushed back its forecast for a rate cut from November to February.

“Overall, inflation continues to moderate year-on-year, but headline CPI remains stuck above the RBA’s target band of 2-3 per cent year-on-year for a record 12 quarters; and ‘core’ is still very sticky,” UBS chief economist George Tharenou said. “We still see a relatively slow easing cycle of 25 basis points per quarter, but our end-2025 forecast is also revised up 25 basis points to 3.35 per cent (was 3.10 per cent).”

Mr Tharenou added that if inflation remained stickier than expected in 2025, it would make it difficult for the RBA to cut, with the bank likely to be slower than other central banks in loosening monetary policy.

Citi and AMP have also pushed back the time frame for rate relief, with the former pushing its expectation of a 25 basis point cut out to February, from November.

“High labour costs continue to pose upside risks to inflation,” Citi chief economist Josh Williamson said.

AMP deputy chief economist Diana Mousina said a rate cut before the end of the year was still on the cards.

“We think we can still see a rate cut by the end of the year as the leading indicators of softer employment growth, lower inflation and subdued consumer spending remain intact,” she said.

Capital Economics Australia economist Abhijit Surya said because underlying inflation barely eased in the quarter there was a risk the RBA might need to lift rates again. “The 1 per cent quarter-on-quarter rise was much stronger than most had anticipated,” he said. “The data reinforces our conviction the RBA is unlikely to cut rates before the December quarter. If anything, the slew of the upside surprise raises the risk the bank will feel the need to hike rates further.”

State Street global markets APAC head of macro strategy Dwyfor Evans said the market should expect a more cautious RBA after its two-day board meeting on May 6 and 7.

He said sticky inflation bolstered views that rate cuts remain off the table, and was expecting Australia to be one of the last countries to get rate relief. “Expect a more cautious RBA … and a potential shift up to revised inflation expectations,” he said.

Comparison website RateCity noted that mortgage holders who had initially budgeted for three rate cuts this year could be short as much as $226 a month, based on someone with a $500,000 debt and 25 years remaining. “Borrowers … should shift their focus to making sure they can meet their mortgage repayments for the remainder of 2024,” research director Sally Tindall said.

Data from the ABS showed that the RBA’s preferred gauge of inflation — trimmed mean inflation — which excludes more volatile items including food and energy — slowed from 4.2 per cent to 4 per cent in the quarter.

Insurance prices rose 16.4 per cent annually in the strongest rise since 2001 as many insurers have lifted premiums due to extreme weather events, coupled supply chain woes and higher global reassurance costs.

Education was the most significant contributor to quarter rise after increasing by 5.9 per cent, followed by 2.8 per cent uplift in health and 0.7 per cent in housing. Insurance had the largest increase in the past year with prices up 8.2 per cent.

Education fees increased with the start of the calendar year, showing the strongest quarterly rise since 2012. Tertiary education rose 6.5 per cent with annual CPI indexation being applied to tertiary education fees. Secondary education rose 6.1 per cent, followed by Preschool and primary education up 4.3 per cent as fees increased.

Food and non-alcoholic beverage prices rose this quarter, driven by non-alcoholic beverages and fruit and vegetables.

Partially offsetting the quarterly rise was a price fall of 0.7 per cent for meat and seafood.