Australia central bank sees more gradual decline in core inflation, less spare capacity
AUSTRALIA’S central bank cautioned on Tuesday that core inflation was likely to slow more gradually than previously thought as it revised up the outlook for public spending and consumer demand.
Yet, it still judged risks to the outlook for the economy and inflation are broadly balanced as financial conditions remain restrictive overall.
In its quarterly Statement on Monetary Policy, released simultaneously as its interest rate decision, the Reserve Bank of Australia (RBA) estimated there was less spare capacity in the economy than previously assumed and core inflation would fall more gradually as a result.
Underlying inflation - a trimmed mean measure closely watched by the RBA - is now expected to slow to 3.5 per cent by year-end, compared to 3.4 per cent previously. It was seen declining to 2.9 per cent by late 2025 and 2.6 per cent by the end of 2026.
The central bank aims to keep inflation in a 2-3 per cent band over time with a focus on the midpoint of 2.5 per cent.
The RBA judged there was more excess demand in the economy and labour market than previously thought, while forecasts for government spending were revised up.
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“This suggests the economy and labour market have been further away from potential output and full employment than previously thought,” said the RBA in the 59-page document.
“All else equal, this starting point of greater imbalance between aggregate demand and supply implies that it would take longer for inflation to return to target.”
The headline consumer price index (CPI) was now seen dipping below 3 per cent early next year, from the current 3.8 per cent, but mainly due to government rebates on electricity bills.
Once those rebates rolled off in mid-2025, CPI inflation was seen popping back up to 3.7 per cent before easing again.
The forecasts were based on market pricing in the middle of last week, which assumed rates would stay at 4.35 per cent until the end of the year, before hitting 4.0 per cent by June 2025 and 3.3 per cent by December 2026.
The RBA has raised interest rates by 425 basis points since May 2022 to tame inflation and is widely expected to hold rates at 4.35 per cent at its policy meeting on Tuesday.
The ongoing rout in markets has led investors to price in accelerated rate cuts globally, including a first easing from the RBA in November.
Reflecting stronger consumer demand and public spending, Australia’s economic growth is expected to pick up to 1.7 per cent by the year end and to 2.6 per cent by June 2025. That compared with previous forecasts of 1.2 per cent and 1.6 per cent.
The RBA also now expects the jobless rate - which was at 4.1 per cent in June - to hit 4.4 per cent by June next year and staying here until the end of 2026. REUTERS
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