Australia’s Inflation, Wages Outlook Rises Sharply as Interest Rates Look Set to Increase

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To forestall a wage-price spiral, Australia’s central bank raised its prediction for core inflation this year and is imploring higher interest rates.

The Reserve Bank’s quarterly Statement on Monetary Policy, released Friday, indicated that trimmed mean inflation is expected to reach 6.25% for the year ended June – an increase from 5.5%.

Australia’s Share Market

The measure is projected to drop to 4.25% in December, with wages anticipated to exceed 4% in June and peak at a high of 4.25%.

Inflation in Australia is too high and is broadly based,” the RBA said.

Given the current tightness in the labour market, there are upside risks to wage growth. Price and wage-setting behaviour could become more sensitive to strong demand and high inflation.” RBA added. 

The Reserve Bank of Australia’s decision to switch its stance and focus on a more hawkish approach is better understood by the higher inflation and wages forecasts, which are in line with other developed nations. 

This belief has been reinforced further as it anticipates that interest rates will increase from their current 3.35% mark.

Projections indicate that the cash interest rate is expected to peak at 3.75% before sliding down to 3% by mid-2025, and population growth will be restored to its pre-pandemic levels of 1.5%.

Central Bank of Australia

Australia’s central bank is part of the global tightening trend to rein in inflation. Forecasts suggest that the Federal Reserve may need to raise its benchmark above 6%.

Governor Philip Lowe surprised markets when he said, “further increases in interest rates will be needed to ensure the current high inflation is only temporary.”

The RBA declared that inflation is “too high” and the labour market “very stringent”. Its liaisons with businesses illustrate that wage growth expanded notably due to rigid labour supply, increased employee turnover, high inflation figures, and a consequence of the Fair Work Commission’s decision released in June.

The Reserve Bank of Australia (RBA) identified household consumption as a significant source of unpredictability and stated that it would closely monitor firms’ pricing strategies and alterations in labour costs. 

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