The Reserve Bank of Australia (RBA) warned on Friday that core inflation could hit 4.6% by December well above the RBA’s 2-3% target band.
The central bank’s drastic inflation revisions could foreshadow more interest rate rises to bring the country’s cost of living crisis under control.
In its quarterly statement on monetary policy, the RBA said unemployment was now forecast to drop further to 50-year lows of 3.6% over the year ahead and finally push up wages after years of miserly gains.
Annual wage growth is seen accelerating to 3.0% by the end of this year, from the current 2.3%, and to 3.7% by mid-2024.
First Increase in More Than a Decade
It was this potent mix that led the RBA board this week to raise interest rates by 25 basis points to 0.35%, the first increase in more than a decade, and to flag a lot more rises ahead.
“The board is committed to doing what is necessary to ensure inflation in Australia returns to target over time,” governor Philip Lowe wrote in the 68-page statement. “This will require a further lift in interest rates over the period ahead.”
Markets are pricing in another rise to at least 0.60% in June and then a move a month to reach 2.75% by Christmas.
The RBA’s own forecasts are based on rates of 1.75% by year end and a peak around 2.5% by the end of 2023.
Lowe himself nominated 2.5% as a rate that would be neutral for the economy, but was noncommittal on how fast, or whether, they might get there.
- Reuters, with additional editing by George Russell
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