(Bloomberg) -- Australia’s central bank will probably raise interest rates three more times in coming months to counter persistently elevated inflation driven by surging services prices, according to two economists.

Yaying Dong at Credit Suisse Group AG sees the Reserve Bank’s cash rate at 4.6% by September as services inflation becomes “much more entrenched.” Fellow economist Stephen Anthony, who previously worked at the IMF and Australian Treasury, sees a slightly longer run up to the same peak. 

Their views contrast with many economists’ estimates and money market pricing showing a good chance of just one more rate hike from the current 3.85%. Dong and Anthony’s calls are closer to the 4.8% used by the RBA in scenario modeling revealed in a Bloomberg Freedom of Information request.

“We haven’t broken the back of inflation expectations,” said Anthony, managing director at Macroeconomics Advisory. “At 3.85% we’re somewhere near neutral and that increase to 4.6% could be interpreted as just mildly contractionary.” The RBA has characterized the current rate as restrictive.

That outlook appeared extreme a month ago, before the RBA surprisingly hiked at its May meeting, and even just earlier this week, prior to unexpectedly hot inflation. It also dovetails with hawkish rhetoric from Governor Philip Lowe during testimony Wednesday, when he said the RBA will do whatever is necessary to bring inflation down to its 2-3% target, from around 7% now.

The central bank, which meets Tuesday to decide rates, is concerned about potential upside surprises from inflation, a very tight labor market and rapidly rebounding house prices. Dong and Anthony cited similar worries in explaining how they came to their forecasts.

“What’s very surprising in this cycle has really been the strength of labor force attachment,” said Dong, Sydney-based equity and macro strategist at Credit Suisse. “This is why our models suggest that core inflation is just going to take a much longer time to return back to the target unless the RBA were to raise rates more aggressively.”

His proprietary “Nowcast” model shows that inflation-adjusted GDP growth has stabilized at around 2% over the first five months of the year, driven by a solid recovery in house prices, still-strong business activity and a surprisingly sturdy credit expansion.

“There’s still plenty of growth drivers in the economy at the moment,” Dong said. “As long as we experience strong labor force expansion, core and services inflation will continue to print on the upside. And that’s going to be a territory that the RBA is going to be uncomfortable about.”

Data out this week bolstered the case for further rate hikes. Inflation accelerated faster than expected in April, Sydney house prices jumped the most since 2021 in May, while Bloomberg Economics estimates Australian firms are set to unleash record spending in 2023-24.

Anthony attributed this strength to the massive fiscal and monetary stimulus delivered during the pandemic that translated into “really significant savings buffer in the economy” that are helping to “shockproof many households.” 

He is forecasting one rate hike in each of the third and fourth quarters this year and in the first quarter of 2024.

“We can wait and see but the pain point hasn’t been reached yet,” Anthony said. “We just haven’t reached any sort of softening in activity in the economy more broadly.”

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