RBA warns inflation more persistent, revises its forecasts higher

SYDNEY — The Reserve Bank of Australia sharply revised up its forecasts for core inflation in the near term and warned that inflation pressures are cooling at a slower pace than anticipated against the backdrop of an economy that is proving more resilient than expected.

Trimmed mean inflation, which is central to policy decisions at the RBA, is now expected to be running at 4.0% on-year by mid-2024, up from a forecast of 3.25% on-year in August.

Overall, the RBA expects inflation will be at the top of its 2%-3% target band by the end of 2025, but its outlook now assumes greater risks in the near term, which, if realized, could underpin further interest-rate increases.

“Inflation in Australia has passed its peak but it is still too high and is proving more persistent than expected a few months ago,” the central bank said Friday in a statement on monetary policy.

The new forecast comes after the decision by the RBA’s policy-setting board on Tuesday to raise the official cash rate a further 25 basis points to 4.35%, the first increase since June.

The hike was the thirteenth since May last year, and followed data showing that inflation was stickier than anticipated in the third quarter.

Still, the RBA appears cautious overall, saying that it will examine the data flow closely to assess if further interest-rate increases are needed, while noting that the full impact of prior rate increases is yet to be felt.

“The board’s priority is to return inflation to target. Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon data and the evolving assessment of risks,” the RBA said.

The forecasts are the first to be overseen by recently-appointed Gov. Michele Bullock, who replaced Philip Lowe in September. Bullock said recently that the RBA would “not hesitate” to raise interest rates if the environment for inflation deteriorated.

The RBA outlook also pointed to growing evidence that inflation expectations are beginning to rise.

“The weight of recent information suggests that the risk of inflation remaining higher for longer has increased,” the central bank said. “While it has been reassuring that medium-term inflation expectations have remained anchored to date, some measures have recently been edging up,” it added.

Unhinged inflationary expectations could quickly become a problem, especially if productivity growth remains weak, the RBA said.

The RBA’s stronger forecasts for both gross domestic product growth and unemployment reflected the recent resilience of the economy.

GDP growth is expected to be soft over the forecast horizon, but gradually strengthen from around mid-2024 to be around 2.25% by the end of 2025.

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