Highlights
The Reserve Bank of Australia has published its quarterly Statement on Monetary Policy (SMP) after leaving policy rates on hold at 3.60 percent at its monthly meeting earlier in the week. The statement updates the RBA's inflation and growth forecasts and advises that officials expect that"further increases in interest rates will be needed to ensure that the current period of high inflation is only temporary".
Since the RBA's previous assessment, published in early February, incoming data have shown a moderation in price pressures, with monthly headline CPI inflation falling from 7.4 percent in January to 6.8 percent in February and 6.3 percent in March, closer to the RBA's target range of 2.0 percent to 3.0 percent. Measures of core inflation have also moderated over this period but remain elevated.
Reflecting these developments, officials have revised their near-term inflation forecasts lower. Headline inflation is now forecast to be 6.3 percent mid-year and 4.5 percent at end-2023, compared with the previous forecasts of 6.7 percent and 4.8 percent respectively. Further ahead, however, inflation forecasts are unchanged, with headline inflation still expected to fall to 3.6 percent at mid-2024, 3.2 percent at end-2024, and 3.0 percent at mid-2025. The trimmed mean measure of inflation is also forecast to trend lower over the forecast period to 2.9 percent by mid-2025.
The RBA has also lowered its near-term GDP forecasts, noting the impact of previous policy tightening. Australia's economy is now forecast to expand by 1.2 percent on the year in the three months to December 2023, down from 1.6 percent previously, with officials now forecasting weaker growth in household consumption, dwelling investment, and public demand, partly offset by stronger growth in business investment and exports. GDP is forecast to grow by 1.7 percent in the three months to December 2024, up slightly from 1.6 percent 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 350 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 3.60 percent to a peak of 3.75 percent before falling to around 3.0 percent by mid-2025. 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 rate trajectory priced in by markets 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 loosened less 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 February, incoming data have shown a moderation in price pressures, with monthly headline CPI inflation falling from 7.4 percent in January to 6.8 percent in February and 6.3 percent in March, closer to the RBA's target range of 2.0 percent to 3.0 percent. Measures of core inflation have also moderated over this period but remain elevated.
Reflecting these developments, officials have revised their near-term inflation forecasts lower. Headline inflation is now forecast to be 6.3 percent mid-year and 4.5 percent at end-2023, compared with the previous forecasts of 6.7 percent and 4.8 percent respectively. Further ahead, however, inflation forecasts are unchanged, with headline inflation still expected to fall to 3.6 percent at mid-2024, 3.2 percent at end-2024, and 3.0 percent at mid-2025. The trimmed mean measure of inflation is also forecast to trend lower over the forecast period to 2.9 percent by mid-2025.
The RBA has also lowered its near-term GDP forecasts, noting the impact of previous policy tightening. Australia's economy is now forecast to expand by 1.2 percent on the year in the three months to December 2023, down from 1.6 percent previously, with officials now forecasting weaker growth in household consumption, dwelling investment, and public demand, partly offset by stronger growth in business investment and exports. GDP is forecast to grow by 1.7 percent in the three months to December 2024, up slightly from 1.6 percent 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 350 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 3.60 percent to a peak of 3.75 percent before falling to around 3.0 percent by mid-2025. 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 rate trajectory priced in by markets 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 loosened less 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.
