RBA cuts GDP, inflation forecasts as rate hikes cool activity
AUSTRALIA’S central bank lowered its forecasts for inflation, wages and broader gross domestic product (GDP) growth this year, suggesting its 11 interest-rate increases since last May are gaining traction in the economy.
The Reserve Bank of Australia (RBA) estimated trimmed mean inflation at 6 per cent in the year-ended June, down from 6.25 per cent seen three months earlier, its quarterly Statement on Monetary Policy showed on Friday (May 5). The gauge is then likely to ease to 4 per cent in December versus 4.25 per cent previously. Wages, which were earlier expected to peak at 4.2 per cent later this year, are now seen at 4 per cent by December and 3.7 per cent by June 2025.
The forecasts are based on the cash rate peaking at 3.75 per cent and partly explain the RBA’s unexpected hike this week to 3.85 per cent, which was likely aimed at ensuring the board meets the downgraded estimates. The outlook assumes the cash rate will decline to 3 per cent by mid-2025.
“The Australian labour market is still very tight,” the RBA said, explaining its decision to resume tightening this week after a pause in April. “Moreover, there are signs that asset prices – including the exchange rate and housing prices – have been responding to the expectation that interest rates may not increase.”
Australia’s central bank is part of a worldwide wave of tightening as monetary authorities try to bring inflation under control, though most are nearing the end of the cycle following aggressive moves. The Federal Reserve hiked by a quarter-percentage point this week while the Reserve Bank of New Zealand is seen moving by a similar amount later this month.
The RBA warned that inflation is “very high” even though it has passed its peak. The bank cited liaison with businesses showing that wages growth “has stabilised at around 4 per cent” and is expected to moderate in the near-term as labour availability has improved.
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Some firms negotiating new enterprise bargaining agreements are expecting 3-5 per cent wage hikes while those on wages linked to award rates have noted an annual minimum wage decision by the Fair Work Commission in June is a “key uncertainty”.
Among other uncertainties, the RBA highlighted the outlook for household consumption, saying a recent stabilisation in house prices suggests the drag on consumer spending from declining wealth could now be smaller than previously assumed. It expects demand for housing to be supported by higher-than-expected population growth while a shortfall of housing supply is likely to put “continued upward pressure on rents, adding to the inflation forecast”.
The bank highlighted energy prices and rents as key drivers of inflation in the period ahead.
The RBA sees household consumption growth slowing to 1.3 per cent by end-2023 from 5.4 per cent last year. That will result in a sharp slowdown in economic growth given private consumption accounts for two-thirds of Australia’s GDP.
The RBA forecasts the economy will expand 1.25 per cent this year, from 2.7 per cent in 2022. It is then seen edging up to 2 per cent by mid-2025. Unemployment is seen rising to 4 per cent later this year, from 3.5 per cent at present, and then reach 4.5 per cent by late 2024. BLOOMBERG
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