Australian central bank cuts growth outlook, sees inflation moving in ‘right direction’
AUSTRALIA’S central bank on Friday trimmed its outlook for economic growth and prices, saying inflation is heading in the right direction and providing time to consider whether further rises in interest rates would be needed.
In a quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) said it had considered raising rates at its August policy meeting this week but decided the stronger case was for a pause, in part because past hikes had put many households in a “painful squeeze.”
The RBA this week held rates steady for a second straight month at 4.1 per cent, having jacked up rates by a whopping 400 basis points since May last year in the most aggressive tightening campaign in modern history.
While inflation was still too high at 6 per cent, the board judged the risks around the outlook were now broadly balanced, with inflation set to return to the target band of 2-3 per cent in late 2025.
Noting that policy acted with a lag and its intent to preserve job gains, the RBA felt it could take “some more time” to assess how the economy and risks to inflation and employment were evolving.
Much will depend on how inflation expectations evolve.
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“If inflation expectations were to rise, the result would be even higher interest rates, a more substantial slowing in the economy and a larger rise in unemployment to bring inflation back to target,” warned the bank in its 73-page report.
Markets suspects rates have likely peaked, with futures pricing in a 50-50 chance of one further hike in the fourth quarter of the year. Still, a majority of economists expect one more hike by the end of the year as high services inflation and productivity growth lags.
The RBA now sees economic growth slowing to just 0.9 per cent this year, compared with the previous estimate of 1.2 per cent, before picking up to 2.3 per cent in 2025. Given strong population growth of around 2.0 per cent, GDP per capita was set to decline.
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Headline inflation is expected to slow to 4.1 per cent by the end of this year, down from the previous forecast of 4.5 per cent, but remain sticky in 2024 before easing back to 2.8 per cent by end of 2025.
The forecast for trimmed mean inflation remains largely unchanged, returning to the bank’s target in mid-2025.
All these forecasts are based on the technical assumption that interest rates peak at around 4.25 per cent by end of this year, before easing back to 3.25 per cent by end-2025.
Key uncertainties to its forecasts include the outlook for Australia’s biggest export market China, household consumption, inflation getting more persistent than expected and goods prices declining significantly.
Annual wage growth is expected to pick up to a peak of 4.1 per cent at the end of this year, compared with the previous forecast of 4.0 per cent, before easing back to 3.6 per cent by end-2025.
The unemployment rate is expected to increase to 4.5 per cent by mid-2025, from the current 3.5 per cent. REUTERS
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