Australia’s central bank lowered its forecasts for inflation, wages and broader GDP growth this year, suggesting its 11 interest-rate increases since last May are gaining traction in the economy.
(Bloomberg) — Australia’s central bank lowered its forecasts for inflation, wages and broader GDP growth this year, suggesting its 11 interest-rate increases since last May are gaining traction in the economy.
The Reserve Bank estimated trimmed mean inflation at 6% in the year-ended June, down from 6.25% seen three months earlier, its quarterly Statement on Monetary Policy showed Friday. The gauge is then likely to ease to 4% in December versus 4.25% previously. Wages, which were earlier expected to peak at 4.2% later this year, are now seen at 4% by December and 3.7% by June-2025.
The forecasts are based on the cash rate peaking at 3.75% and partly explain the RBA’s unexpected hike this week to 3.85%, which was likely aimed at ensuring the board meets the downgraded estimates. The outlook assumes the cash rate will decline to 3% by mid-2025.
“The Australian labor 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 stabilized at around 4%” and is expected to moderate in the near-term as labor availability has improved.
Some firms negotiating new enterprise bargaining agreements are expecting 3-5% 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 stabilization 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% by end-2023 from 5.4% 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 1.25% this year, from 2.7% in 2022. It is then seen edging up to 2% by mid-2025. Unemployment is seen rising to 4% later this year, from 3.5% at present, and then reach 4.5% by late 2024.
The RBA also highlighted some insights from its business liaison program:
- Growth in household spending has slowed with demand for leisure-related services seeing some signs of softening of late
- Domestic tourism demand remains strong, business travel demand is expected to recover further over the next 12 months
- Residential construction activity is expected to decline
- Services exports are expected to continue to grow driven by a bounce-back in international student commencements as well as tourism
- Firms expect to increase their prices at a more moderate pace over the next 12 months as consumers are less able to withstand higher costs
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.