The Reserve Bank of Australia (RBA) foresees a delay in reaching its inflation target midpoint until mid-2026, with a longer timeline possible if there is no return to sustained labor productivity growth.
In the upcoming quarter, the RBA anticipates inflation to dip to 3.3%, slightly below the target range of 2%-3%, taking more than 18 months to fall below 3% and over two years to reach the midpoint at 2.6%. The RBA attributes persistent inflation to aggregate demand surpassing the economy’s capacity, emphasizing the need for a rebound in labor productivity. Despite recent economic slowdown, the RBA projects two cash rate cuts by December, contingent on market and economist expectations, and assumes a significant rebound in labor productivity for achieving target inflation.
The statement underscores the alignment of nominal wages growth forecasts with the inflation target, contingent on the return of labor productivity to long-term averages. Despite the difficulty in predicting productivity growth, the statement attributes recent declines to pandemic and economic cycle effects, anticipating a reversal in the coming years. Economic growth projections have slightly decreased due to the impact of inflation and high interest rates on household consumption, with GDP expected to grow by 1.3% in 2023-24 and 2.1% in 2024-25. Nevertheless, a gradual growth pickup is anticipated from late 2024 as inflation decreases and pressures on household incomes alleviate.
The RBA highlights two significant risks to the domestic outlook, balancing the associated costs. The first risk pertains to the potential softening of demand, impacting the bank’s full-employment goal but resulting in a faster-than-expected decline in inflation. The second risk involves the prolonged return of inflation to the target, posing costs to both employment and inflation objectives if it leads to upward-drifting inflation expectations. The RBA foresees a gradual easing of labor market tightness, with unemployment expected to rise from 3.9% in January to 4.2% by June and 4.3% by year-end. Despite a slower pace, employment growth is anticipated to persist compared to the previous two years.
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