Highlights
The Reserve Bank of Australia has published its quarterly Statement on Monetary Policy (SMP) after increasing policy rates by 25 basis to 3.35 percent at its monthly meeting earlier in the week. The statement updates the RBA's inflation and growth forecasts and suggests officials believe that policy will need to be tightened further in coming months.
Since the RBA's previous assessment published in early November incoming data have shown a further acceleration in price pressures, with headline inflation picking up from 7.3 percent in the three months to September to 7.8 percent in the three months to December, its highest level since 1990 and further above the RBA's target range of 2.0 percent to 3.0 percent. Measures of core inflation have also picked up sharply, with trimmed mean inflation increasing from 6.1 percent to 6.9 percent, its highest level since it was introduced in 2003.
Reflecting these developments, the RBA now forecasts that CPI inflation will be higher than previously expected this year, though they still expect it to fall both this year and next. Headline inflation is now forecast to be 6.7 percent mid-year and 4.8 percent at end-2023, compared with the previous forecasts of 6.3 percent and 4.8 percent respectively. Officials now forecast headline inflation will be 3.6 percent mid-2024, compared with the previous forecast of 4.2 percent, but they have retained their forecast that it will fall to 3.2 percent at end-2024. They have now published a forecast for mid-2025, with headline inflation expected to be at the top of their target range at that stage. The trimmed mean measure of inflation is also forecast to trend lower over the forecast period to 2.0 percent by mid-2025.
The RBA has made little changes to its GDP forecasts despite expressing uncertainty about the outlook for household spending when it raised policy rates earlier this week. Australia's economy is now forecast to expand by 1.6 percent on the year in the three months to December 2023, up from 1.4 percent previously, and by 1.6 percent in the three months to December 2024, unchanged from previously.
Today's statement therefore shows that the RBA continues to forecast both headline and underlying measures of inflation will remain above its target range over the next two years, despite having increased policy rates by 325 basis points since last May. This forecast is based on an assumption that policy rates will increase, in line with market expectations, from the current level of 3.35 percent to a peak of 4.00 percent around the end of this year. This assumption about the trajectory of policy rates does not represent forward guidance from the RBA about the likely timing and scale of policy tightening. It does, however, indicate that officials currently believe that the rate increases priced in by markets over the next 12 months will not be enough to return inflation back to its target range over the next two years.
This suggests that officials may conclude that policy will need to be tightened to a greater extent and more quickly than is currently priced in by markets. Today's statement concludes with officials promising to do"what is necessary" to ensure that inflation in Australia returns to target and advising that the RBA expects further rate increases will be required in coming months.
Since the RBA's previous assessment published in early November incoming data have shown a further acceleration in price pressures, with headline inflation picking up from 7.3 percent in the three months to September to 7.8 percent in the three months to December, its highest level since 1990 and further above the RBA's target range of 2.0 percent to 3.0 percent. Measures of core inflation have also picked up sharply, with trimmed mean inflation increasing from 6.1 percent to 6.9 percent, its highest level since it was introduced in 2003.
Reflecting these developments, the RBA now forecasts that CPI inflation will be higher than previously expected this year, though they still expect it to fall both this year and next. Headline inflation is now forecast to be 6.7 percent mid-year and 4.8 percent at end-2023, compared with the previous forecasts of 6.3 percent and 4.8 percent respectively. Officials now forecast headline inflation will be 3.6 percent mid-2024, compared with the previous forecast of 4.2 percent, but they have retained their forecast that it will fall to 3.2 percent at end-2024. They have now published a forecast for mid-2025, with headline inflation expected to be at the top of their target range at that stage. The trimmed mean measure of inflation is also forecast to trend lower over the forecast period to 2.0 percent by mid-2025.
The RBA has made little changes to its GDP forecasts despite expressing uncertainty about the outlook for household spending when it raised policy rates earlier this week. Australia's economy is now forecast to expand by 1.6 percent on the year in the three months to December 2023, up from 1.4 percent previously, and by 1.6 percent in the three months to December 2024, unchanged from previously.
Today's statement therefore shows that the RBA continues to forecast both headline and underlying measures of inflation will remain above its target range over the next two years, despite having increased policy rates by 325 basis points since last May. This forecast is based on an assumption that policy rates will increase, in line with market expectations, from the current level of 3.35 percent to a peak of 4.00 percent around the end of this year. This assumption about the trajectory of policy rates does not represent forward guidance from the RBA about the likely timing and scale of policy tightening. It does, however, indicate that officials currently believe that the rate increases priced in by markets over the next 12 months will not be enough to return inflation back to its target range over the next two years.
This suggests that officials may conclude that policy will need to be tightened to a greater extent and more quickly than is currently priced in by markets. Today's statement concludes with officials promising to do"what is necessary" to ensure that inflation in Australia returns to target and advising that the RBA expects further rate increases will be required in coming months.
Definition
The Reserve Bank of Australia (RBA) publishes a quarterly Statement on Monetary Policy providing updated economic forecasts and a detailed assessment of economic conditions and prospects. The Statement is published four times a year in February, May, August and November.
Description
The Statement on Monetary Policy provides detailed information on the Reserve Bank of Australia’s assessment of economic conditions and prospects as well as updated forecasts. These inform policy decisions made by RBA offical at their monthly meetings. The Statement also contains analysis and data on various topics related to the Australian economy. The Statement allows investors to understand better the rationale for policy decisions and to form a judgement about the potential direction of policy.
