Central Bank of Australia announced further increase in rates
2023.02.10 01:07
Central Bank of Australia announced further increase in rates
By Ray Johnson
Budrigannews.com – On Friday, Australia’s central bank raised its expectations for core inflation and wage growth and issued a warning about further interest rate increases, raising the possibility that the economy will enter a recession.
The Reserve Bank of Australia (RBA) stated that domestically sourced cost pressures were still picking up in its quarterly Statement on Monetary Policy, despite the possibility that consumer price inflation as a whole may have finally peaked last quarter.
Australia had experienced faster-than-expected inflation in the service sector, despite the cooling in global goods price growth.
The Reserve Bank of Australia (RBA) stated, “The Board expects that further increases in interest rates will be required to ensure that the current period of high inflation is only temporary,” implying that two or more hikes were in the works.
“The Board will continue to play close attention to both the price-setting behavior of firms and the evolution of labor costs in the period ahead, given the importance of avoiding a price-wage spiral.”
The RBA increased its cash rate on Tuesday for the ninth time in a row to a new decade-high of 3.35 percent, bringing the total amount of tightening since May to a whopping 325 basis points.
After a shocking inflation report for the fourth quarter, it also surprised markets by indicating that additional increases were required, putting an end to speculation about a pause and prompting a sharp increase in the outlook for terminal rates to 4%. George Tharenou, chief economist at UBS, stated, “Today’s SOMP showed a surprisingly hawkish inflation outlook.” We change our view once more to two more 25bps hikes because of the additional hawkishness in today’s SOMP.”
The risk of a recession in the second half of this year has significantly increased to approximately 25%, according to Tharenou, who now sees rates peaking at 3.85% as opposed to 3.35 percent previously.
By June of this year, it is anticipated that consumer price inflation will only slow to 6.7%, up from a previous forecast of 6.3%. Consumer price inflation is currently at a 32-year high of 7.8%. By the middle of 2025, it should then slow even further to the top of the RBA’s target range of 2% to 3%.
By the middle of this year, the closely watched trimmed mean measure of inflation will only slow to 6.2%, down from a previous forecast of 5.4%.
At the end of this year, wage growth is expected to reach a peak of 4.2 percent, up from the previous forecast of 3.9 percent, before falling back to 3.8 percent by the middle of 2025.
One-third of private sector businesses surveyed by the RBA’s business liaison program reported wage increases of more than 5% in the December quarter.
By the middle of 2025, the unemployment rate is expected to steadily rise to 4.4% from the current 3.5%.
All of these predictions are based on the technical assumption that interest rates will reach a high of around 3.75 percent in the middle of 2023 and then fall back to around 3 percent until June 2025.
Additionally, the bank increased its projection for this year’s economic expansion from 1.4% to 1.6%. Australia’s terms of trade and national income have been supported by China’s sudden elimination of COVID curbs, which has contributed to growth in global demand.
