In its quarterly statement on monetary policy released on Friday, the Reserve Bank (RBA) predicted that Australia’s unemployment rate will drop to as low as 3.25 per cent in the coming months.
According to the RBA’s updated forecasts, the jobless rate will end the year at 3.4 per cent, down from a previous prediction of 3.7 per cent made by the central bank in May.
Unemployment is then expected to gradually lift to 3.5 per cent in December 2023, 3.7 per cent in June 2024, and 4.0 per cent in December 2024.
“The domestic labour market is the tightest it has been in many years,” the RBA said.
“Employment growth has been strong and the unemployment rate has declined faster than earlier expected, to be 3.5 per cent in June — its lowest level in almost 50 years. Underemployment has also declined and the employment-to-population ratio and participation rate are both at record highs.”
The RBA stated that the tightness of the labour market was expected to result in stronger wages growth moving forward, with the wage price index now forecast to reach 3.4 per cent in mid-2023, up from 2.4 per cent in the March quarter.
However, growth in labour costs is predicted to continue to lag behind inflation, which RBA governor Philip Lowe said is expected to peak at 7.75 per cent by the end 2022.
“An increasing share of firms in liaison and business surveys have reported that they are paying larger wage increases this year, including because of the recent decision by the Fair Work Commission on minimum and award rates of pay,” the RBA noted.
“Recent high inflation outcomes have also been a factor in some recent wage negotiations.”
After peaking towards the end of the year, CPI inflation is forecasted to begin falling, reaching 6.2 per cent by mid next year and 4.3 per cent by the end of 2023. It is expected to continue to decline to 3.5 per cent in June 2024 and 3.0 per cent in December 2024.
In the statement on monetary policy, the RBA acknowledged that inflation was now higher than previously expected and the labour market had tightened faster than was thought likely.
“In this environment, there is a risk that expectations of high inflation might be built into price and wage-setting behaviour, making the higher inflation more persistent,” it said.
“At the same time, the outlook for both the global and the Australian economies has been downgraded, as central banks raise interest rates and household budgets come under pressure because of higher inflation.
“In light of these developments and risks, the Reserve Bank Board has continued the process begun in May of normalising monetary conditions in Australia.”
As previously stated by Dr Lowe following the RBA’s decision to lift the cash rate by 50 basis points to 1.85 per cent in August. The RBA said that it was committed to doing what is necessary to ensure that inflation returns to its target band of 2 to 3 per cent over time.
“It is seeking to do this in a way that keeps the economy on an even keel. The path to achieve this balance is a narrow one and subject to considerable uncertainty,” the RBA said.
“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market.”
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.