Australia Raises Inflation, Wages Outlook, Sees Higher Rates
Bloomberg · 10 Feb 512 Views

The Reserve Bank of Australia (RBA) building in Sydney. Photographer: Brent Lewin/Bloomberg

  • RBA forecasts based on cash rate peaking at 3.75% this year
  • Central bank wary of wage-price spiral risk, watching closely
Australia’s central bank boosted its forecast for core inflation this year and is trying to ensure the economy avoids a wage-price spiral, underscoring the need for even higher interest rates.

The Reserve Bank predicted trimmed mean inflation at 6.25% in the year-ended June, up from 5.5% previously, its quarterly Statement on Monetary Policy showed Friday. The measure is then likely to ease to 4.25% in December. Wages are expected to climb above 4% in June and peak at 4.25% later this year.

“Inflation in Australia is too high and is broadly based,” the RBA said. 

“Given the current tightness in the labor market there are upside risks to wages growth,” it said. “Price and wage-setting behavior could become more sensitive to strong demand and high inflation.”

The higher inflation and wages forecasts underscore the central bank’s decision to pivot to a more hawkish stance as it acknowledges Australia’s position is no different to developed-world counterparts. That’s reflected in its expectation that rates will have to move higher from the current 3.35%.

Today’s forecasts are based on the cash rate peaking at 3.75% in the second-half of this year, before declining to 3% by mid-2025. Population growth is seen at 1.5%, returning to around pre-pandemic levels.

Australia’s central bank is part of a worldwide wave of tightening as monetary authorities try to bring inflation under control, with predictions the Federal Reserve may have to take its benchmark above 6%. Governor Philip Lowe surprised markets Tuesday when he said “further increases in interest rates will be needed to ensure the current period of high inflation is only temporary.”

In December, the board had considered a pause in its tightening cycle.

The RBA warned that inflation is “too high” and the labor market “very tight.” It cited liaison with businesses showing that the pickup in wages growth “has largely been driven by strong labor demand in a tight labor market, elevated staff turnover, higher inflation outcomes and pass-through to wages from the Fair Work Commission’s decision announced in June.”

The RBA highlighted the outlook for household consumption as a key uncertainty, saying the board will pay close attention to both price-setting behavior of firms and the evolution of labor costs. There were also uncertainties about energy and other supply shocks as well as the risk of any vaccine-resistant variant of Covid-19.

The bank sees household consumption growth slowing to 1.7% by end-2023 from a forecast 5.5% 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 1.6% this year, from a forecast 2.7% in 2022. It is then seen edging down to 1.4% by mid-2024 as rising borrowing costs weigh on households. Unemployment estimates were left unchanged at 3.75% for December 2023, rising to 4.5% by mid-2025 from 3.5% at present.

On the positive side, the central bank expects export volumes to grow strongly as tourism and education arrivals rebound and China, Australia’s biggest trading partner, reopens from Covid restrictions.

The RBA also highlighted some insights from its business liaison program:
  • Firms are expected to increase prices further in response to costs, albeit at a slower pace than in 2022
  • Hiring intentions remain elevated, and private sector wages growth has strengthened
  • Household spending has held up well given the higher cost of living
  • Community service providers are finding it challenging to meet demand
  • Business investment plans are little changed despite higher costs
(Source: Bloomberg), all rights reserved by original source.