Its Over

RBA increases inflation forecasts, warns of more rate rises
Michael ReadReporter
Feb 10, 2023 – 11.40am

The Reserve Bank of Australia has again revised up its inflation forecasts but says Australia’s outbreak of rapidly rising prices has probably peaked.
In its latest Statement on Monetary Policy, the central bank on Friday upgraded its near-term inflation forecasts in response to a strong December quarter CPI number and expectations that wages are poised to grow at a faster rate than it had previously expected.
The RBA reiterated that multiple interest rate “increases” will be necessary to ensure that high inflation is only temporary, echoing its surprisingly hawkish statement on Tuesday.
Trimmed mean inflation, which is currently running at 6.9 per cent, is now expected to fall to 4.3 per cent by the end of the year, compared to the central bank’s previous forecast of 3.8 per cent.
Headline inflation is expected to ease to 4.8 per cent by the end of the year, down from its current rate of 7.8 per cent, but it is not expected to return to the top of the bank’s 2-3 per cent target band until mid-2025.

The bank says that a pickup in wages growth is one of the factors driving prices higher.
Annual wages growth is expected to reach 4.2 per cent by the end of the year, up from the RBA’s previous forecast of 3.9 per cent, published last November.
Australia’s incredibly tight labour market is forcing firms to offer higher salaries and make increasing use of one-off bonuses.
About one-third of private sector firms in the RBA’s business liaison program delivered wage increases in excess of 5 per cent in the December quarter – something that rarely happened in the years leading up to the pandemic.
Rate shock

On Tuesday, the RBA delivered a ninth straight official interest rate rise, to 3.35 per cent, a 10-year-high, and indicated 4 per cent-plus rates may be needed to tame high inflation.
The RBA’s unexpectedly hawkish post-board meeting statement on Tuesday prompted markets to revise forecasts the central bank’s terminal policy rate higher.
Markets expect the cash rate to peak at 3.97 per cent in August, implying the boarding will deliver multiple additional rate rises.
Households have accumulated about $300 billion in additional savings since the start of the pandemic, which has provided a cushion to borrowers dealing with rapidly rising interest rates.
On Friday the bank said there was considerable uncertainty around the level of interest rates needed to achieve its objective of lowering inflation.
“The board is mindful that a considerable adjustment to interest rates has already been made and that monetary policy affects activity and inflation with a lag and through different channels.”

The RBA warned in its quarterly statement that a wage-price spiral could cause high inflation to persist for longer than expected.
“Longer term inflation expectations and wages growth in Australia have so far remained consistent with the inflation target. It is important this remains the case,” the statement said.
“That said, domestically sourced inflation and wages growth are both picking up. Given the importance of avoiding a price-wage spiral, the board will continue to play close attention to both the price-setting behaviour of firms and the evolution of labour costs in the period ahead.”
Strong domestic demand, Australia’s historically tight labour market, and supply disruptions caused by floods are contributing to upward pressure on prices.
The RBA continues to expect the economy will slow over the course of the year, as higher interest rates, cost of living pressures, and falling wealth forces households to cut back.
Economic growth is expected to average 1.5 per cent over both 2023 and 2024.