Highlights
The Reserve Bank of Australia has published its quarterly Statement on Monetary Policy (SMP) after increasing policy rates by 25 basis points to 4.35 percent at its monthly meeting earlier in the week. The statement updates the RBA's inflation and growth forecasts and reiterates that officials will"do what is necessary" to return headline inflation to their target range of two percent to three percent.
Since the RBA's previous assessment, published in early August, incoming data have shown renewed upward pressure on headline inflation, largely reflecting higher fuel prices. Monthly headline CPI inflation fell from 5.4 percent in June to 4.9 percent in July but then increased to 5.2 percent in August and 5.6 percent in September. Measures of core inflation have moderated over this period but remain elevated.
Reflecting these developments, officials have revised their near-term inflation forecasts slightly higher. Headline inflation is now forecast to be 4.5 percent at end-2023 and 3.5 percent at end-2024, compared with the previous forecasts of 4.1 percent and 3.3 percent respectively. Further ahead, headline inflation is forecast to fall to 3.3 percent at mid-2025 and 2.9 percent at end-2025, up slightly from the previous forecasts of 3.1 percent and 2.8 percent respectively. The forecast for the trimmed mean measure of inflation at end-2025 has also been revised up from 2.8 percent to 2.9 percent.
Officials, however, are now more optimistic about growth prospects, largely reflecting stronger forecasts for household consumption. Australia's economy is now forecast to expand by 1.6 percent on the year in the three months to December 2023, up from 0.9 percent previously, by 2.0 percent in the three months to December 2024, up from 1.6 percent previously, and by 2.4 percent in the three months to December 2025, up from 2.3 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 425 basis points since last May. This forecast is based on an assumption that policy rates will, in line with market expectations, peak around the 4.5 percent before falling to around 3.5 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 indicating again that further rate hikes may yet still be required.
Since the RBA's previous assessment, published in early August, incoming data have shown renewed upward pressure on headline inflation, largely reflecting higher fuel prices. Monthly headline CPI inflation fell from 5.4 percent in June to 4.9 percent in July but then increased to 5.2 percent in August and 5.6 percent in September. Measures of core inflation have moderated over this period but remain elevated.
Reflecting these developments, officials have revised their near-term inflation forecasts slightly higher. Headline inflation is now forecast to be 4.5 percent at end-2023 and 3.5 percent at end-2024, compared with the previous forecasts of 4.1 percent and 3.3 percent respectively. Further ahead, headline inflation is forecast to fall to 3.3 percent at mid-2025 and 2.9 percent at end-2025, up slightly from the previous forecasts of 3.1 percent and 2.8 percent respectively. The forecast for the trimmed mean measure of inflation at end-2025 has also been revised up from 2.8 percent to 2.9 percent.
Officials, however, are now more optimistic about growth prospects, largely reflecting stronger forecasts for household consumption. Australia's economy is now forecast to expand by 1.6 percent on the year in the three months to December 2023, up from 0.9 percent previously, by 2.0 percent in the three months to December 2024, up from 1.6 percent previously, and by 2.4 percent in the three months to December 2025, up from 2.3 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 425 basis points since last May. This forecast is based on an assumption that policy rates will, in line with market expectations, peak around the 4.5 percent before falling to around 3.5 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 indicating again that further rate hikes may yet still be required.
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.
