The Reserve Bank of Australia (RBA) has published it statement on monetary policy following its decision to resume its tightening cycle on 7 November.
The RBA actioned its 13th hike to the cash rate since commencing its tightening cycle in May 2022, taking the official cash rate to 4.35 per cent.
The lift followed evidence of a reacceleration in inflationary pressures, with both headline and core inflation up 1.2 per cent over the September quarter – 30 bps above the RBA’s projection.
In lieu of the upside surprise over the September quarter, the RBA has revised its forecasts for the economic outlook, now projecting slower progress to the 2–3 per cent inflation target.
The RBA now expects headline inflation to ease to just 4.5 per cent by the end of the year, up from 4.25 per cent in its previous forecast published in August.
Inflation is then tipped to ease to 3.5 per cent by the end of 2024 (up from 3.25 per cent) before hitting the top end of the target range (3 per cent) by the end of 2025 (revised up from 2.75 per cent).
“The forecast decline in inflation is more gradual than anticipated three months ago because domestic inflationary pressures are dissipating more slowly than previously thought,” the RBA stated.
“Goods prices have accounted for almost all of the decline in inflation so far; goods inflation is expected to continue falling in the near term as the resolution of supply disruptions flows through to prices paid by consumers.
“By contrast, services inflation remains high. Services inflation is expected to ease but to remain above its inflation-targeting average throughout the forecast period in an environment of elevated domestic cost pressures and still-robust levels of demand.”
The RBA has also revised its projections for GDP growth, now anticipating more resilience in the near-term.
The GDP is expected to grow 1.5 per cent in 2023, up 50 bps from its previous forecast of 1 per cent and to 2 per cent in 2024 (up from 1.75 per cent).
It’s forecasts for 2025 remain unchanged, with the RBA projecting GDP growth of 2.25 per cent over the 12 months to 31 December 2023.
Additionally, labour market tightness is expected to persist, with the RBA now forecasting an unemployment rate of 3.75 per cent (down from 4 per cent) by the end of 2023, and 4.25 per cent by the end of 2024 (down from 4.5 per cent.
“The near-term outlook for employment growth has been revised higher because of the stronger outlook for domestic activity and an assumption of stronger growth in the working-age population over the year ahead; growth in the working-age population supports growth in labour supply while also adding to aggregate demand in the economy,” the RBA noted.
“Employment is expected to increase further over the next couple of years and much of the labour market adjustment to below-trend growth in economic activity is expected to occur through a decline in average hours worked.
“The labour market is less tight than in late 2022, though labour market spare capacity is still around multi-decade lows, and measures of labour underutilisation (i.e. people working fewer hours than they want) are expected to continue to increase gradually over the next two years.”
Reflecting on the RBA’s latest forecasts, Commonwealth Bank’s head of Australian economics, Gareth Aird, said the risks of further tightening of monetary policy are elevated.
“There are a lot of moving parts to the economic landscape at present, which adds to uncertainty around the economic outlook and the path of monetary policy,” he said.
“In the near-term, the balance of risks sits with a higher terminal cash rate than 4.35 per cent. Another upside surprise in the Q4 23 CPI could see the RBA pull the rate hike trigger again.”
CBA’s base case is for no further increases to the cash rate, and for the potential commencement of monetary policy easing in mid-2024 to stave off a sharper economic downturn.
