Australia’s Central Bank Has Upgraded Its Inflation Predictions, Signalling Further Rate Hikes Shortly

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The Reserve Bank of Australia upgraded its forecasts on core inflation and wage growth, signalling possible further interest rate hikes that could cause the nation to enter a recession.

In its most recent Statement on Monetary Policy, the Reserve Bank of Australia (RBA) declared that even though consumer price inflation may have hit a peak last quarter, domestically-induced cost pressures are still growing.

The deceleration of global commodities prices had yet to reflect significantly on the Australian inflation rate because service sector costs have risen more quickly than anticipated.

The Board expects that further increases in interest rates will be needed to ensure that the current period of high inflation is only temporary,” said the RBA, implying two or more hikes were waiting in the wings.

Given the importance of avoiding a price-wage spiral, the Board will continue to play close attention to both the price-setting behaviour of firms and the evolution of labour costs in the period ahead,” RBA added. 

The RBA has shockingly raised its cash rate nine times in a row to an all-time high of 3.35 per cent, amounting to an extraordinary 325 basis points increase since last May.

Unexpectedly, the Federal Reserve indicated that further hikes in interest rates were necessary, thus eliminating any speculation of a halt and incentivizing markets to amend their forecasts on terminal rates to 4 per cent. It came after an unanticipated inflation report at the end of quarter four.

“Today’s SOMP showed a surprisingly hawkish inflation outlook. The extra hawkishness in today’s SOMP means we change our view again to two more 25bps hikes,” said George Tharenou, chief economist at UBS.

Tharenou recently witnessed comparable rates peak at 3.85 per cent as opposed to the previous rate of 3.35 per cent, signifying that the odds of an economic recession during this second half have significantly increased, now estimated to be about 25 per cent. 

Consumer price inflation is currently running at a heightened 32-year high of 7.8 per cent, which should decelerate from 6.7 per cent by June 2021 and further reduce to 2-3 per cent within four years; this figure surpasses prior forecasts by 0.4 per cent.

To reflect the sudden spike in global demand due to China’s removal of Covid restrictions, the bank has revised its forecast for economic growth this year from 1.4 per cent to an impressive 1.6 per cent. This uptick is expected to bolster Australia’s terms of trade and national income significantly.

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