In its quarterly Statement on Monetary Policy, the Reserve Bank of Australia downgraded the outlook for economic growth, as it warned that more hikes are required to cool down red-hot inflation.
RBA upped its forecasts for inflation as it now expects wages growth to accelerate more quickly and unemployment to pick up faster in 2023.
But even with further rate hikes, inflation was not expected to return to the central bank’s target range of between 2% and 3% beyond the end of 2024, pointing to a long period of pain ahead, CNBC reported.
“There are many uncertainties surrounding these forecasts that make the path to achieving the board’s objective of returning inflation to target while keeping the domestic economy on an even keel a narrow one,” RBA said.
Steeply rising electricity and gas prices, which are tipped to surge by 20-30% next year, would also likely slow the return of inflation to the target range, while another round of floods has damaged the domestic food supply, the bank said.
From the August forecast of 7.75%, consumer inflation is now predicted to peak around 8% later this year. Core inflation — the trimmed mean — would likely speed up to 6.5% by the end of 2022, up from 6% previously.
Both measures are expected to only ease to 3.2% by the end of 2024.
The silver lining, however, is that medium-term inflation expectations and wages growth have remained consistent with the inflation target, and it is crucial that this continues to be the case, the bank said.
Annual wage growth is predicted to rise to 3.1% this year and pick up further to 3.9% for the next two years, which would be the fastest in many years.
Last week, RBA hiked its cash rate by 25 basis points to a nine-year peak of 2.85%, bringing its tightening to a steep 275 basis points since May. It became the first of the major world central banks to slow its pace when it downshifted to a 25-basis point rise in October after four outsized hikes of half a point.
RBA explained the downshift, saying it was cautious that the policy operates with a lag and the full effect of higher rates is yet to be felt in mortgage payments and household budgets, CNBC reported.
And with higher inflation eroding real household incomes amid a potential global recession, RBA is forced to walk a narrow path between taming inflation while not tipping the economy into recession.
The bank reaffirmed, however, that it was determined to bring inflation back to target, warning that rates will need to rise further.
“If in future the board judges that it needs to increase the cash rate in larger steps to secure the return of inflation to target, it will do so,” RBA said. “Similarly, if the situation requires the board to hold the cash rate steady for a period, it will do so.”
RBA is forecasted to lift the OCR by another quarter-point in December, with the cash rate expected to peak around 4.1% by July next year.
Forecasts for economic growth in 2022 were reduced by a 0.3 percentage point to 2.9% and were cut to 1.4% and 1.6% for 2023 and 2024, respectively.
RBA now expects the jobless rate to continue to sit at its nearly 50-year low of 3.4% by the end of the year, the same as the previous forecast, before lifting to 4.3% by late 2024.
All these forecasts are based on the technical assumption that interest rates hit a peak of around 3.5% in the middle of next year before easing back to around 3% by the end of 2024, CNBC reported.
