Australia’s near-term inflation should decline faster than previously predicted as wage growth “momentum” eases and the economy slows but avoids a technical recession, the Reserve Bank said in its latest quarterly statement on monetary policy.
The forecasts, released on Friday, are likely to foster expectations the RBA is close to if not at the end of its record pace of interest rate rises that began last May.
The outlook also takes into account increased government spending, a signal that increased outlays by the federal government in next week’s budget won’t necessarily add to the risk of further rate rises.
“Inflation has passed its peak in Australia but remains very high,” the RBA said at the start of its report, closing it with a restatement of its “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%] target in a reasonable timeframe,” depending on how the data evolve.
That current data points to mostly easing pressures on price increases. The economy will end 2023 growing at a 1.2% pace, slower than the 1.6% clip expected in the previous quarterly statement. The expected GDP growth rate by the end of 2024 would quicken to 1.7% – similar to the forecast from February’s report – and reach 2.1% by mid-2025.
By December, the consumer price index will be down to 4.5%, compared with the RBA’s February forecast of 4.8%. For the March quarter, it was 7% – close to three-decade highs.
The underlying inflation rate – known as the trimmed mean that strips out more volatile price movements – will end the year at 4%. That’s lower than the 4.3% level forecast three months ago, and well down on the 6.6% annual pace for the March quarter.
Economists and investors will pore over the updated forecasts for indications of what the RBA might do next. Markets and most pundits were caught off guard by Tuesday’s 25 basis-point hike in the cash rate to 3.85 – an 11-year high.
The report should give some comfort to those hoping the central bank is near to the end of its rate rises, if it hasn’t already reaching that point. Most economic signals point to a weaker economy that – if the 2%-plus increase in population is taken into account – will enter a per-capita recession this year and possibly next.
The jobless rate would be marginally higher by December at 4%, up from 3.5% in March and the earlier year-end prediction of 3.8%, the RBA said. Later forecasts remained similar, with a 4.5% unemployment rate penciled in for mid-2025. Such rates would remain lower than pre-pandemic levels.
Wage increases would come in at a slower pace than previously expected all the way out to mid-2025, reducing risks of a “wage-price spiral” that the RBA had highlighted over the past year. Indeed, the words “wage-price” or “price-wage” spiral are absent in this quarter’s report.
“Timely indicators suggest that wages growth was solid in the March quarter of 2023,” the RBA said. “Firms in the bank’s liaison program report that their wages growth has stabilised at around 4%, but that they expect growth to moderate in the year ahead.”
Real household income that adjusts for inflation would shrink at annual pace of 2.5% in the year to June but end the year flat, the RBA said. That’s worse than the 0.9% rate of shrinkage for the 12 months to June forecast three months ago, while the year-end outlook is little changed.
Rents, which rose at annual rate of 5% in the March quarter, are expected to rise further as the population increases. Meanwhile, the rebound in house prices – a factor in this month’s interest rate rise – may mean the drag on household consumption from a perception of declining wealth “could be smaller than previously assumed”.
Energy prices are forecast to rise further over the second half of 2023 as retail charges catch up with wholesale costs, the RBA said. The government’s gas price caps – extended to mid-2025 or later – are expected to limit the inflationary impact but more expensive energy will add 0.25 percentage points to CPI in 2023-24 with “relatively small” changes in 2024-25.
Public demand will increase 0.9% in 2023, up from a 0.1% increase that the RBA had expected three months ago. The growth pace will abate slightly in 2024 and by mid-2025, public spending should be rising at an annual 2.4% clip, or faster than the 1.6% rate predicted three months ago.
Among the risks the RBA will be monitoring is the potential for inflation to remain high over time, especially if increases in the price of services is not reined-in.
“[I]t is possible that the easing in inflation takes longer than [expected], consistent with the persistence in services inflation experienced overseas so far,” the RBA said.
“In a high inflation environment, it is easier for firms to increase prices; people may also tend to pay closer attention to changes in costs and prices than when inflation is low, and so may come to expect further larger price increases.”
Ahead of today's RBA release of its updated statement on monetary policy, investors were continuing to bet the central bank's cash rate had peaked. The next move would be a cut by about February. pic.twitter.com/PXJ19X4p2y
— @phannam@mastodon.green (@p_hannam) May 4, 2023
The RBA downplayed the role of fatter corporate profits in propelling inflation higher, as some have argued.
On the question of “have business profits contributed to inflation?”, the bank said there was “little evidence that there has been a broad-based increase in domestic non-mining profit margins”.
“[O]utside of the mining sector … aggregate profits have grown at a similar pace to labour income, with some variation between non-mining sectors,” it said. “These observations are consistent with firms having generally passed on higher costs to maintain their profit margins, and aggregate inflation having been driven by the balance of demand and supply factors – rather than changes in firms’ pricing power.”
