Pawan Kumar
Governor Philip Lowe’s Statement Monetary Policy
Inflation is still very high on a global scale. Nonetheless, it is slowing down as a result of falling energy prices, the clearing of supply-chain issues, and the tightening of Monetary Policy. But before inflation returns to goal levels, there will be a delay. With predicted growth this year and next of less than average, the prognosis for the global economy remains gloomy.
Inflation in Australia’s CPI reached its highest level since 1990, 7.8%%, in the quarter ending in December of that year. Inflation was greater than projected at 6.9% in terms of the underlying price level. The majority of this high inflation may be attributed to global sources, but strong local demand is ratcheting up inflationary pressures across the economy in a number of different sectors.
Due to both global reasons and the slower expansion of domestic demand, inflation is anticipated to decrease this year. Inflation as measured by the CPI is expected to fall to 43.4 percent this year and to about 3 percent by mid-2025, according to the main prediction. It’s critical that this hold true because medium-term inflation expectations are still firmly anchored.
Over the course of 2022, the Australian economy increased rapidly. The primary prediction has not significantly changed from three months ago; over 2023 and 2024, GDP growth is anticipated to decrease to approximately 1 12%. Following the removal of COVID limits, expenditure on services recovered somewhat, but it has now mostly peaked, and the more difficult financial situation will limit spending more broadly.
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There is still a severe shortage of labour. In recent months, the unemployment rate has been stable at around 312%, the lowest level since 1974. Both the number of open positions and the number of job adverts are extremely high, however they have just started to fall. Although some companies claim that the labour shortage has recently eased, many businesses still have trouble hiring employees. Unemployment is predicted to rise as economic growth weakens. By the end of this year, the jobless rate is expected to rise to 334 percent, and by the middle of 2025, it will be 412 percent.
Because of the tight labour market and greater inflation, wages growth has been increasing from its low rates in recent years, and more increase is anticipated. The Board will continue to pay careful attention to the evolution of labour costs as well as the behaviour of enterprises in establishing prices in the period ahead given the significance of preventing a prices-wages spiral.
The Board is aware that there is a lag in the implementation of monetary policy and that mortgage payments have not yet fully benefited from the overall rise in interest rates. The timing and size of the anticipated decrease in household expenditure are also unknowns. However, due to higher interest rates and rising costs of living, some households are feeling a harsh squeeze on their budgets while others have sizable savings buffers. The drop in housing values also has an impact on household balance sheets. Another area of concern is how the global economy will react to the sharp and sudden rise in interest rates taking place everywhere. A number of possible outcomes for the Australian economy exist as a result of these uncertainty.
Regaining target inflation is the Board’s top objective. The economy’s ability to function is harmed by high inflation, which also makes life tough for people. It would also be incredibly expensive to lower inflation later if it were to get ingrained in people’s expectations. The Board’s goal is to keep the economy stable while bringing inflation back to a range of 2% to 3%, but there is still a long way to go before a soft landing can be achieved.
The Board anticipates that additional interest rate hikes will be required in the upcoming months to ensure that inflation returns to goal and that this high inflation rate is merely momentary. The Board will closely monitor changes in the global economy, patterns in household spending, and predictions for inflation and the labour market as these will all be taken into account when determining how much higher interest rates need to be. The Board will take whatever steps are required to bring inflation back to goal. This determination has not wavered.
