Australia’s Central Bank Believes That Rates Will Have to Rise to Control the Current Inflation

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Australia’s central bank has lowered the nation’s economic growth outlook for the near future and reiterated that more interest rate hikes might be needed to tame inflation. 

The decision was made to avoid an official recession. According to its quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) expects wage growth to accelerate and inflation to rise. The RBA predicts that unemployment will pick up faster next year.

Despite increments in pricing, analysts do not forecast deflation to arrive at the targets of 2-3% set by the bank. It suggests a significant time ahead when rates will continue to climb.

The RBA said, “There are many uncertainties surrounding these forecasts that make the path to achieving the Board’s objective of returning inflation to target while keeping the domestic economy on an even keel a narrow one.” 

The impending inflation, caused by higher electricity and gas prices rising 20-30% next year, and another round of floods damaging the domestic food supply, will most likely slow down the return to the target range.

This year, annual wage growth is expected to rise to 3.1%. By 2023 and 2024, it is projected to accelerate further to 3.9%, which would be the quickest it has been in many years. On Tuesday, the central bank raised its cash rate by 25 basis points to 2.85%, a nine-year high. It marks 275 basis points of tightening since May.

In October, after four hikes of half a point each, the central bank downshifted to 25 basis point increases, making it the first significant world central bank to bring down its pace.

The RBA stated that the main reason for the downshift is higher mortgage rates and shrinking household budgets. It also mentioned that a global recession is possible, which would cause inflation to rise, reducing real household incomes.

All these predictions are contingent upon the technical assumption that interest rates will max out at approximately 3.5% in mid-2023 before dropping back to around 3% by late 2024.

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