SYDNEY – The Reserve Bank of Australia (RBA) has significantly revised its predictions for core inflation in the near term, highlighting that inflation pressures are easing at a slower rate than initially expected. This development occurs amid the backdrop of an economy that has proven to be more resilient than anticipated.
According to the RBA, the trimmed mean inflation, which plays a crucial role in policy decisions, is now projected to reach 4.0% year-on-year by mid-2024. This figure represents an upward revision from the previous forecast of 3.25% year-on-year made in August.
While the RBA expects inflation to be at the upper end of its 2%-3% target range by the end of 2025, there are now additional short-term risks to consider. Should these risks materialize, they could provide further support for increased interest rates.
The central bank issued a statement on monetary policy last Friday, stating, “Inflation in Australia has already peaked; however, it remains unacceptably high and is demonstrating greater persistence than anticipated a few months ago.”
This new forecast follows the recent decision by the RBA’s policy-setting board to raise the official cash rate by 25 basis points to 4.35% on Tuesday. This marks the first interest rate hike since June.
Notably, this latest increase represents the thirteenth consecutive hike since May of last year. The decision was prompted by data indicating that inflation was more stubborn than originally predicted during the third quarter.
Nonetheless, the RBA maintains a cautious approach, highlighting their intention to closely monitor incoming data before determining whether further interest rate hikes are necessary. Additionally, they acknowledge that the full impact of previous rate increases has yet to be fully felt.
RBA Prioritizes Returning Inflation to Target
The Reserve Bank of Australia (RBA) stated that their priority is to bring inflation back to its target level. The decision on whether further tightening of monetary policy is necessary will be based on data and the assessment of risks.
First overseen by newly-appointed Gov. Michele Bullock, the RBA’s forecasts indicate a willingness to raise interest rates if the inflation environment worsens. Notably, there is evidence of increasing inflation expectations.
According to the central bank, recent information suggests a higher risk of persistent inflation. While medium-term inflation expectations have remained stable so far, certain measures have shown some upward movement.
The RBA emphasized that uncontrolled inflationary expectations could pose problems, especially if productivity growth remains weak.
The RBA’s optimistic forecasts for gross domestic product (GDP) growth and unemployment reflect the economy’s current resilience.
Although GDP growth is expected to be modest in the forecast horizon, it is projected to gradually strengthen from mid-2024, reaching approximately 2.25% by the end of 2025.
