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RBA lowers 2023 inflation forecasts, CBA predicts rate cuts

6 minute read

The Reserve Bank has released its quarterly Statement on Monetary Policy.

Australia’s headline consumer price index (CPI) is expected to fall to 4.5 per cent by the end of the year, according to revised forecasts from the Reserve Bank of Australia (RBA).

In its latest Statement on Monetary Policy, the RBA downwardly revised its inflation projections for 2023, with the central bank tipping that CPI will drop from 7.0 per cent in the March quarter to 6.3 per cent in the June quarter and 4.5 per cent in the December quarter.

This is down from the RBA’s previous Statement on Monetary Policy published in February, which forecast that CPI would sit at 6.7 per cent in June and 4.8 per cent in December.


Similar revisions were also seen for the trimmed mean measure of inflation. The RBA has predicted that trimmed mean inflation will fall to 4.0 per cent by the December quarter, lower than its earlier projection of 4.3 per cent, and down from 6.6 per cent in the March quarter.

But the RBA has left its inflation forecasts for 2024 and the first half of 2025 unchanged, with the central bank warning that a return to the target range of 2–3 per cent “will take some time”.

This follows on from RBA governor Philip Lowe’s statement following May’s surprise interest rate hike, in which he reiterated that inflation, while past its peak, “is still too high”.

Next year, CPI is projected to fall to 3.6 per cent in the June quarter and 3.2 per cent in the December quarter, before finally falling to 3.0 per cent in the June quarter of 2025.

“Goods price inflation is expected to decline further as the easing seen in global price pressures continues to be passed through in Australia. Services inflation is expected to be more persistent, although it is expected to ease in the latter part of the forecast period as interest rates weigh on demand and, in time, growth in unit labour costs eases,” the RBA said.

“Energy costs are expected to increase in coming quarters, although government policy measures are expected to limit the increases. Rent inflation is expected to continue to pick up over the next year or so, and to add materially to inflation over the forecast period.”

The RBA noted that medium-term inflation expectations have so far remained consistent with inflation returning to the target range.

“On current forecasts, inflation is not expected to return to target until mid-2025. The longer inflation remains above target, the greater the risk that inflation expectations rise, and price- and wage-setting behaviour might adjust accordingly,” the central bank said.

“If this were to eventuate, the end result would be even higher interest rates and a larger rise in unemployment would be required to bring inflation back to target.”

Echoing Lowe’s comments following May’s rate hike, the RBA indicated that some further tightening of monetary policy may be required to ensure that inflation returns to target in a “reasonable timeframe” dependent on how the economy and inflation evolve.

“The board will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market,” it said.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Has the cash rate peaked?

In its latest Statement on Monetary Policy, the RBA also forecast that GDP growth would fall from 2.7 per cent over 2022 to 1.2 per cent over 2023, down from its previous forecast of 1.6 per cent growth for this year.

The unemployment rate, which sat at 3.5 per cent in April, is expected to rise to 4.0 per cent at the end of this year and 4.4 per cent at the end of next year. Wages growth is expected to peak at 4.0 per cent at the end of 2023 before lowering to 3.8 per cent by the end of 2024.

Commonwealth Bank of Australia (CBA) head of Australian economics Gareth Aird and economist Stephen Wu said that the RBA’s newly updated forecasts should mean that 3.85 per cent is the peak in the cash rate.

“From a monetary policy perspective, we think that the RBA will not hike the cash rate again in this cycle. This is simply based on our take of the board’s reaction function from here,” they said.

“That is, the economic data will need to print stronger than the RBA’s updated forecasts for them to increase the cash rate again. And that is not our base case.”

However, Mr Aird and Mr Wu noted that “no economist has a crystal ball”, with the risk that upcoming data could surprise to the upside.

“As such, the near-term risk sits with another rate increase and markets should be aware of this. Looking further ahead, our base case sees the RBA commence an easing cycle in late 2023,” the CBA economists said.

CBA has predicted a total of 125 basis points of monetary policy easing by the end of 2024.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.