Australia raises inflation, wages outlook, sees higher rates
AUSTRALIA’S central bank boosted its forecast for core inflation this year and is trying to ensure the economy avoids a wage-price spiral, underscoring the need for even higher interest rates.
The Reserve Bank of Australia (RBA) predicted trimmed mean inflation at 6.25 per cent in the year ended June, up from 5.5 per cent previously, its quarterly Statement on Monetary Policy showed on Friday (Feb 10). The measure is then likely to ease to 4.25 per cent in December. Wages are expected to climb above 4 per cent in June and peak at 4.25 per cent later this year.
“Inflation in Australia is too high and is broadly based,” the RBA said.
“Given the current tightness in the labour market there are upside risks to wages growth,” it said. “Price and wage-setting behaviour could become more sensitive to strong demand and high inflation.”
The higher inflation and wages forecasts underscore the central bank’s decision to pivot to a more hawkish stance as it acknowledges Australia’s position is no different to developed-world counterparts. That’s reflected in its expectation that rates will have to move higher from the current 3.35 per cent.
Today’s forecasts are based on the cash rate peaking at 3.75 per cent in the second half of this year, before declining to 3 per cent by mid-2025. Population growth is seen at 1.5 per cent, returning to around pre-pandemic levels.
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Australia’s central bank is part of a worldwide wave of tightening as monetary authorities try to bring inflation under control, with predictions the Federal Reserve may have to take its benchmark above 6 per cent. Governor Philip Lowe surprised markets Tuesday when he said “further increases in interest rates will be needed to ensure the current period of high inflation is only temporary”.
In December, the board had considered a pause in its tightening cycle.
The RBA warned that inflation is “too high” and the labour market “very tight”. It cited liaison with businesses showing that the pickup in wages growth “has largely been driven by strong labour demand in a tight labour market, elevated staff turnover, higher inflation outcomes and pass-through to wages from the Fair Work Commission’s decision announced in June”.
The RBA highlighted the outlook for household consumption as a key uncertainty, saying the board will pay close attention to both price-setting behaviour of firms and the evolution of labour costs. There were also uncertainties about energy and other supply shocks as well as the risk of any vaccine-resistant variant of Covid-19.
The bank sees household consumption growth slowing to 1.7 per cent by end-2023 from a forecast of 5.5 per cent last year. That will result in a sharp slowdown in economic growth given private consumption accounts for two-thirds of Australia’s gross domestic product.
The RBA forecasts the economy will expand 1.6 per cent this year, from a forecast of 2.7 per cent in 2022. It is then seen edging down to 1.4 per cent by mid-2024 as rising borrowing costs weigh on households. Unemployment estimates were left unchanged at 3.75 per cent for December 2023, rising to 4.5 per cent by mid-2025 from 3.5 per cent at present.
On the positive side, the central bank expects export volumes to grow strongly as tourism and education arrivals rebound and China, Australia’s biggest trading partner, reopens from Covid restrictions.
The RBA also highlighted some insights from its business liaison programme:
- Firms are expected to increase prices further in response to costs, albeit at a slower pace than in 2022.
- Hiring intentions remain elevated, and private sector wages growth has strengthened.
- Household spending has held up well given the higher cost of living.
- Community service providers are finding it challenging to meet demand.
- Business investment plans are little changed despite higher costs. BLOOMBERG
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