Economy

RBA raises inflation forecasts

Tue 01 Feb 22, 3:43pm (AEST)
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Key Points

  • The RBA today kept the cash rate at 0.1%
  • The central bank expects underlying inflation to increase in coming quarters to around 3.25%
  • higher prices & supply chain disruption are pushing the CPI higher

While the RBA today kept the cash rate at 0.1%, and the interest rate on Exchange Settlement balances at zero %, the central bank expects underlying inflation to increase further in coming quarters to around 3.25%.

But as supply-side problems are resolved and consumption patterns normalise, the central bank expects underlying inflation to decline to around 2.75% over 2023.

As many economists had expected, the RBA has taken its cue from other central banks globally and signalled plans to cease further purchases of government securities with the final operation to take place on 10 February.

However, the RBA made it clear that ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates. As a result, the Board has stated “it will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range.”

What the RBA said

Here are some key excerpts from the statement made by the RBA today:

“The decision to end purchases under the bond purchase program follows a review of the actions of other central banks, the functioning of Australia’s bond market and the progress towards the goals of full employment and inflation consistent with target.

“Many other central banks have ended, or will soon end, their bond purchase programs. More importantly, faster-than-expected progress has been made towards the RBA’s goals and further progress is likely. In these circumstances, the Board judged that now was the right time to end the bond purchase program.

CPI hit by higher prices & supply chain disruption

“Inflation has picked up more quickly than the RBA had expected but remains lower than in many other countries. The headline CPI inflation rate is 3.5% and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains. In underlying terms, inflation is 2.6%.

“The RBA’s central forecast is for the unemployment rate to fall to below 4 per cent later in the year and to be around 3¾ per cent at the end of 2023.

“While inflation has picked up, it is too early to conclude that it is sustainably within the target band. There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved.

“Wages growth also remains modest, and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target.”

 

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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