Judo Bank wagers RBA may hold cash rate at 3.6 per cent for ‘the foreseeable future’

An economic recovery and inflation alarm bells have sparked some economists to warn the Reserve Bank may need to push back plans for further interest rate cuts.

Rising consumer spending helped give Australia’s economy a boost in the June quarter and annual growth lifted from 1.4 per cent to 1.8 per cent in data released last week.

It follows signs of renewed price pressure which drove core inflation up 0.6 percentage points to be 2.7 per cent in the year to July.

The Reserve Bank signalled in August that two more rate cuts would be considered in the next six months but Governor Michele Bullock dialled back those hopes last week thanks to the stronger spending figures.

“There may not be many interest rate declines yet to come,” she said in Perth.

Judo Bank economist Warren Hogan said both inflation and growth had been “a little stronger” than the RBA’s forecasts.

“Higher inflation and economic growth suggest monetary policy is supporting the economy, throwing into question whether a further rate cut is required.

“It certainly suggests the three rate cuts priced into money markets may be ambitious.

“If we see further signs of a recovery in economic activity over the next few months and inflation does not surprise on the downside, there is a good chance rates will remain at 3.6 per cent for the foreseeable future.”

Markets on Friday tipped a 16 per cent chance that the RBA would drop rates at the upcoming board meeting at the end of this month.

Mr Hogan said the central bank would keep an eye on the jobs market because an improvement in private sector employment would weaken the case for further rate relief.

HSBC’s Paul Bloxham last week also said there was a risk the RBA need not cut much further.

But Westpac’s Luci Ellis was a little more cautious about the outlook on Monday.

“Spending growth is still not strong per se,” the former RBA deputy boss said.

“What we are seeing is a long-awaited recovery from an extraordinarily long period of weakness.”