Australia’s red-hot inflation is expected to cool faster than predicted, the RBA has revealed – offering a lifeline at last to borrowers reeling after 11 official rate rises in a year.
But the Reserve Bank’s latest economic outlook, released on Friday, did reveal that more interest rate rises remain likely, even after this week’s hike took the official cash rate to a decade-high 3.85 per cent.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” the bank’s statement on monetary policy said.
However, the statement said inflation was longer rising as fast as had been predicted. That is likely to spark predictions that this week’s rates hike might be one of the RBA’s last in this cycle.
“Inflation has passed its peak in Australia but remains very high,” the bank said early in the report. But it ended by restating “resolute” determination to lift rates again if needed.
“Some further tightening of monetary policy may be required to ensure that inflation returns to [the 2-3 per cent] target in a reasonable timeframe,” it said – depending on the data.
In the latest statement, headline inflation is tipped to hit 6.25 per cent in June, down from 6.75 per cent in predictions earlier this year. It is still expected to hit the top of the RBA’s target inflation band of 2-3 per cent by mid-2025, in line with previous forecasts.
“The longer inflation remains above target, the greater the risk that inflation expectations rise and price- and wage-setting behaviour might adjust accordingly,” the statement said.
“If this were to eventuate, the end result would be even higher interest rates and a larger rise in unemployment would be required to bring inflation back to target.”
The RBA said there were a few reasons to believe inflation could prove more stubborn than expected. They included continued weak growth in productivity, rents lifting by more than expected, the wage-price feedback loop becoming stronger than expected, and if businesses kept their prices high even as their costs fell.
“On the other hand, inflation could turn out to be lower than expected if the easing in goods inflation is faster or more widespread than anticipated, including because consumer spending is weaker,” the statement read.
Wages are also on track to grow by less than expected, according to the RBA’s forecasts. The wage price index is expected to keep lifting and peak at 4 per cent by the end of the year.
Earlier forecasts had wages topping out at 4.2 per cent by the end of 2023.
The RBA said this level of wages growth would not hamper its ability to return inflation to target, provided productivity growth recovers.
“The forecast for labour costs is consistent with inflation returning to the bank’s target, provided productivity growth picks up back to pre-pandemic trends,” the bank wrote.
“If this does not occur or higher prices and wages reinforce one another, domestic inflation would be more persistent than the central forecast.”
Predictions for unemployment have also lifted slightly, with the jobless rate now expected to rise to 4.5 per cent by mid-2025.
As previewed earlier in the week, the statement on monetary policy revealed the RBA expects growth to bottom out at 1.25 per cent by the end of 2023, a little under the 1.5 per cent trough predicted earlier.
Economic growth is then expected to gradually pick up to 2 per cent by mid-2025 as it recovers from higher inflation and interest rates, plus the improving property market, which will bolster household wealth.
-with AAP
