Highlights
The Reserve Bank of Australia has published its quarterly Statement on Monetary Policy (SMP) after leaving policy rates on hold at 4.35 percent at its meeting today. The statement updates the RBA's inflation and growth forecasts and reiterates officials' commitment to returning headline inflation to their target range of two percent to three percent.
Since the RBA's previous assessment, published in early November, incoming data have shown a moderation in headline and underlying inflation. Monthly headline CPI inflation fell from 5.6 percent in September to 4.9 percent in October, 4.3 percent in November, and 3.4 percent in December. Quarterly measures of inflation also fell in the three months to December.
Reflecting these developments, officials have revised their near-term inflation forecasts lower. Headline inflation is now forecast to be 3.2 percent at end-2024 compared with the previous forecast of 3.5 percent. Further ahead, headline inflation is forecast to fall to 3.1 percent at mid-2025 and 2.8 percent at end-2025, down slightly from the previous forecasts of 3.3 percent and 2.9 percent respectively. The forecast for the trimmed mean measure of inflation at end-2025 has also been revised down from 2.9 percent to 2.8 percent.
Officials, however, are now less optimistic about growth prospects, largely reflecting concerns about the outlook for household consumption. Australia's economy is now forecast to expand by 1.5 percent on the year in the three months to December 2023, down from 1.6 percent previously, and by 1.8 percent in the three months to December 2024, down from 2.0 percent previously. The forecast for year-over-year growth of 2.3 percent in the three months to December 2025 remains unchanged.
Today's statement therefore shows that the RBA expects both headline and underlying measures of inflation to return within its target range by the end of 2025. This forecast is based on an assumption that policy rates, in line with market expectations, have peaked at their current level and will fall to around 3.9 percent at the end of this year and further to around 3.4 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 now believe that the rate trajectory priced in by markets will be enough to return inflation back to its target range over the next two years.
This suggests that officials may conclude that policy may be able to be lessened over the next forecast period, as is currently priced in by markets. Today's statement, however, concludes that a further rate increase cannot be ruled out, with officials highlighting that their priority is"to ensure that inflation returns to target in a reasonable timeframe".
Since the RBA's previous assessment, published in early November, incoming data have shown a moderation in headline and underlying inflation. Monthly headline CPI inflation fell from 5.6 percent in September to 4.9 percent in October, 4.3 percent in November, and 3.4 percent in December. Quarterly measures of inflation also fell in the three months to December.
Reflecting these developments, officials have revised their near-term inflation forecasts lower. Headline inflation is now forecast to be 3.2 percent at end-2024 compared with the previous forecast of 3.5 percent. Further ahead, headline inflation is forecast to fall to 3.1 percent at mid-2025 and 2.8 percent at end-2025, down slightly from the previous forecasts of 3.3 percent and 2.9 percent respectively. The forecast for the trimmed mean measure of inflation at end-2025 has also been revised down from 2.9 percent to 2.8 percent.
Officials, however, are now less optimistic about growth prospects, largely reflecting concerns about the outlook for household consumption. Australia's economy is now forecast to expand by 1.5 percent on the year in the three months to December 2023, down from 1.6 percent previously, and by 1.8 percent in the three months to December 2024, down from 2.0 percent previously. The forecast for year-over-year growth of 2.3 percent in the three months to December 2025 remains unchanged.
Today's statement therefore shows that the RBA expects both headline and underlying measures of inflation to return within its target range by the end of 2025. This forecast is based on an assumption that policy rates, in line with market expectations, have peaked at their current level and will fall to around 3.9 percent at the end of this year and further to around 3.4 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 now believe that the rate trajectory priced in by markets will be enough to return inflation back to its target range over the next two years.
This suggests that officials may conclude that policy may be able to be lessened over the next forecast period, as is currently priced in by markets. Today's statement, however, concludes that a further rate increase cannot be ruled out, with officials highlighting that their priority is"to ensure that inflation returns to target in a reasonable timeframe".
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.
