The Reserve Bank is more pessimistic than the government about when and how quickly inflation will decline, implying it may need to hoist its interest rate higher for longer to keep price increases in check.
In its quarterly statement on monetary policy, released on Friday, the central bank elaborated on its estimates for GDP growth, consumer and wage inflation, and the jobless rate. Some of the revised forecasts, including cuts in growth, were disclosed in its explanation on Tuesday on why it lifted its interest rate for a fourth month in a row.
Both the RBA and Treasury, which supplied forecasts to the treasurer, Jim Chalmers, for his state of economy speech last week, expect annual consumer price inflation to peak at about 7.75% by the end of 2022.
Both cut the GDP growth rate and expect the unemployment rate to drop – to 3.25% by year’s end, according to the RBA – but only slowly edge higher towards 4% by 2024.
The main distinctions, though, are higher forecasts by the RBA for both the so-called headline consumer price index and the underlying inflation gauge, known as the trimmed mean, than the government. Energy prices are a factor.
“Domestic retail gas and electricity prices are expected to increase by 10–15% over the second half of 2022, given the high global price of energy and recent disruptions in the domestic electricity market,” the RBA said.
“As supply constraints continue to ease, inflation is expected to decline over coming years, to be back around the top of the 2 to 3% target range by the end of 2024,” it said.
By June 2023, the RBA expects CPI to still be at 6.25%, while Treasury was tipping 5.5% for consumer price increases by then. By June 2024, Treasury had it penciled inside that range at 2.75% but the RBA still reckons it will be running at 3.5%.
Back in May, the RBA was forecasting the trimmed mean gauge would come in at 4.75% by the end of the year and slow to 3.5% by next June. Now, though, the peak will be higher in 2022 and still be at 5% by June 2023.
“Trimmed mean inflation is…expected to peak around year-end [2022] at about 6% as firms continue to pass transport and other non-labour cost pressures through to their own prices,” the RBA said in its August report.
Ahead of Friday’s release, investors were betting the RBA’s cash rate – now at 1.85% after this week’s hike – still had about another 1.5 percentage points to rise before it peaked. The major commercial banks, though, were tipping a peak cash rate between 2.6-3% before it starts to fail.
Ahead of the RBA’s quarterly statement on monetary policy, investors were predicting the cash rate had about another 1.5 percentage points to rise before a peak. pic.twitter.com/fPpCnKMS5D
— Peter Hannam (@p_hannam) August 5, 2022
The RBA repeated Tuesday’s comments that it was seeking to curb inflation “in a way that keeps the economy on an even keel”.
“The path to achieve this balance is a narrow one and subject to considerable uncertainty,” it said.
However, one uncertainty was how much of a “general inflation psychology shift” took place, making rising prices “more persistent”.
“The RBA is obviously still in inflation-fighting mode,” said Paul Bloxham, HSBC Australia’s chief economist and a former RBA staffer. “At this point, it is all about keeping inflationary expectations well-anchored in the medium term.”
Also unclear was how much wages would pick up and also how falling property prices would alter households’ sense of wealth. That made the outlook for consumption “unusually uncertain”.
Bloxham noted the RBA is forecasting real household disposable income will be falling at an annual 3.1% clip by the middle of next year. “That’s a very weak outlook,” he said.
A key reason is that even though the jobless rate is at half-century lows and expected to remain so for some time, the pick-up in wages continues to be subdued.
The RBA predicts the wage price index to pick up to “around 3.5% by mid-2023 and 3.75% by the end of 2024” – the fastest pace since 2012. In the March quarter of this year, the annual rate was 2.4%, with the ABS due to release June quarter data on 17 August.
Bloxham, who had predicted the RBA’s cash rate would peak at 2.6% by the end of this year, said Friday’s report had not prompted him to change his forecast.