In a hawkish-sounding quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) said domestically-sourced cost pressures were still picking even if consumer price inflation was a whole may have finally peaked last quarter.
While growth in global goods prices had cooled this was yet
to show clearly in Australia, while inflation in the service
sector had climbed faster than expected.
"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."
On Tuesday, the RBA raised its cash rate for the ninth
straight time to a fresh decade-high of 3.35%, bringing the
total tightening since last May to a whopping 325 basis points.
It also surprised markets by signalling further increases
were needed, quashing talk of a pause and leading markets to
sharply revise up their outlook for terminal rates to 4%, after
a shock fourth-quarter inflation report. "Today's SOMP showed a surprisingly hawkish inflation
outlook," said George Tharenou, chief economist at UBS. "The
extra hawkishness in today's SOMP means we change our view again
to two more 25bps hikes."
Tharenou now sees rates peaking at 3.85%, compared with
3.35% previously, and says the risk of recession in the second
half this year has increased materially to about 25%.
Consumer price inflation is running at a 32-year high of 7.8% and is now expected to only slow to 6.7% by June this year, up from a previous forecast of 6.3%. It should then slow further to the top of the RBA's target range of 2-3% by mid-2025.
The closely-watched trimmed mean measure of inflation will only slow to 6.2% by the middle of this year, compared with a previous forecast of 5.4%. Annual wage growth is expected to pick up to a peak of 4.2% at the end of this year, compared with the previous forecast of 3.9%, before easing back to 3.8% by mid 2025. RBA's business liaison programme found around one-third private sector firms reported an above 5% increase in wages in the December quarter. The unemployment rate is expected to steadily increase to 4.4% by mid-2025, from the current 3.5%.
All these forecasts are based on the technical assumption
that interest rates peak at around 3.75% in mid-2023 before
easing back to around 3% to June 2025.
The bank also raised its forecast of economic growth this
year to 1.6% this year, compared with 1.4% previously. China's
abrupt elimination of COVID curbs has added to growth in global
demand, supporting Australia's terms of trade and national
income.
(Reporting by Stella Qiu; Editing by Wayne Cole & Shri
Navaratnam)
