Better wage growth but inflation to bite for a month

Since May last year, the Reserve Bank has raised the official interest rate from 0.1 percent to 3.35 percent to combat inflation, which hit 7.8 percent in December.

After Tuesday’s 0.25 percentage point rise, RBA Governor Philip Lowe warned that further gains are likely in the coming months. Lowe faces questions at Senate estimates and before the Economic Affairs Committee in Canberra next week.

The Reserve Bank wants inflation to return to its target range of 2-3 percent and now forecasts it will reach that range by June 2025. She wants to do this without plunging the country into recession.

Economic growth is forecast to remain sluggish for the foreseeable future, rising to 2.3 percent in June before slowing to around 1.5 percent and reaching 1.7 percent by June 2025.

“The road to a soft landing remains narrow,” the RBA report said. “There is significant uncertainty about the outlook, and therefore the level of interest rates required to meet the Board’s goals.”

Financial markets are expecting the official interest rate to rise to 4 percent before the end of the year, and some economists believe there is a risk that Australia will slide into recession before the end of the year.

The bank said it was aware it had already made a “significant adjustment” to interest rates and that it would take time for rate hikes to have an impact. Longer-term inflation and wage growth expectations had been consistent with the Bank’s inflation target and it was vital that it remained so.

“However, both domestic-sourced inflation and wage growth are picking up. Given the importance of avoiding a price-wage spiral, the Board will continue to closely monitor both corporate pricing behavior and labor cost developments in the coming period,” the report reads.

Treasurer Jim Chalmers said pressure on the cost of living remains the government’s biggest focus, adding that its plan to cut energy prices is helping to take the sting out of inflation in the economy.

“Our three-point plan to tackle the inflationary challenge in our economy is about responsible living cost reductions, solving supply chain issues and ensuring we have as responsible a budget as possible,” he said.

“We are not surprised, but we are very pleased to see that the independent Reserve Bank said today that our energy plan will have the very consequences and impact we wanted in order to alleviate some of this inflation in our economy.”

Shadow Treasurer Angus Taylor said the government must address rising interest rates and pressure on the cost of living as a top priority.

“You promised lower electricity prices before the election. They promised cheaper mortgages before the election. None of this was delivered. These numbers today confirm exactly that,” he said.

Economists said the monetary policy statement and a change in RBA language in the statement that accompanied Tuesday’s rate decision showed they were concerned inflation could linger.

Economists at the Commonwealth Bank expect the RBA to hike rates at its next two meetings, bringing the official policy rate to 3.85 percent by April.

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“The RBA is clearly more concerned about inflation becoming entrenched,” said Gareth Aird, head of the CBA’s Australian economist.

“Services inflation may appear stubborn over the next six months as wage growth is likely to continue to pick up.”

David Bassanese, Betashares chief economist, said consumer spending has remained fairly resilient over the past year despite rate hikes that have allowed companies to pass supply-side costs on to buyers.

He said the resilience could also be because rising interest rates had a less direct impact on the two-thirds of households that didn’t have a mortgage.

“For a broader effort to slow economic growth, fiscal policy would need to carry more weight, although so far it has been lacking in action,” he said.

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