Highlights
The Reserve Bank of Australia has published its quarterly Statement on Monetary Policy (SMP) after leaving policy rates on hold at 4.10 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"some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe".
Since the RBA's previous assessment, published in early May, incoming data have shown a moderation in price pressures, with monthly headline CPI inflation falling from 6.7 percent in April to 5.5 percent in May and 5.4 percent in June, 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 6.0 percent mid-year and 4.1 percent at end-2023, compared with the previous forecasts of 6.3 percent and 4.5 percent respectively. Further ahead, headline inflation is still expected to fall to 3.6 percent at mid-2024, while the end-2024 forecast has been revised up from 3.2 percent to 3.3 percent, as has the mid-2025 forecast from 3.0 percent to 3.1 percent. Officials now have a forecast for end-2025, predicting inflation will be back in their target range at 2.9 percent by then. The trimmed mean measure of inflation is also forecast to trend lower over the forecast period to 2.9 percent by mid-2025 and 2.8 percent at end-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 0.9 percent on the year in the three months to December 2023, down from 1.2 percent previously. Officials now forecast sharp declines in dwelling investment will happen earlier than previously forecast, but now expect stronger growth in business investment and public demand in coming quarters. Their forecasts for household consumption and trade flows in coming quarters are little changed. GDP is forecast to grow by 1.6 percent in the three months to December 2024, down slightly from 1.7 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 400 basis points since last May. This forecast is based on an assumption that policy rates will, in line with market expectations, peak around the current level of 4.10 percent before falling to around 3.25 percent by end-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 the 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 may need to be tightened further 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 further rate hikes may yet still be required even though they have been left on hold in recent meetings.
Since the RBA's previous assessment, published in early May, incoming data have shown a moderation in price pressures, with monthly headline CPI inflation falling from 6.7 percent in April to 5.5 percent in May and 5.4 percent in June, 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 6.0 percent mid-year and 4.1 percent at end-2023, compared with the previous forecasts of 6.3 percent and 4.5 percent respectively. Further ahead, headline inflation is still expected to fall to 3.6 percent at mid-2024, while the end-2024 forecast has been revised up from 3.2 percent to 3.3 percent, as has the mid-2025 forecast from 3.0 percent to 3.1 percent. Officials now have a forecast for end-2025, predicting inflation will be back in their target range at 2.9 percent by then. The trimmed mean measure of inflation is also forecast to trend lower over the forecast period to 2.9 percent by mid-2025 and 2.8 percent at end-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 0.9 percent on the year in the three months to December 2023, down from 1.2 percent previously. Officials now forecast sharp declines in dwelling investment will happen earlier than previously forecast, but now expect stronger growth in business investment and public demand in coming quarters. Their forecasts for household consumption and trade flows in coming quarters are little changed. GDP is forecast to grow by 1.6 percent in the three months to December 2024, down slightly from 1.7 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 400 basis points since last May. This forecast is based on an assumption that policy rates will, in line with market expectations, peak around the current level of 4.10 percent before falling to around 3.25 percent by end-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 the 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 may need to be tightened further 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 further rate hikes may yet still be required even though they have been left on hold in recent meetings.
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.
