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 April, monthly data have shown an increase in headline inflation from 3.6 percent in April to 4.0 percent in June before easing again to 3.8 percent in May. Quarterly headline inflation rose but underlying measures moderated in the three months to June.
Reflecting these developments, officials have revised their near-term inflation forecasts lower but revised up their medium-term forecasts. This has pushed back their forecast for when they expect inflation to return to its target range. Headline inflation is now forecast to be 3.0 percent at end-2024, compared with the previous forecast of 3.8 percent, and then rise to 3.7 percent at end-2025, up significantly from the previous forecast of 2.8 percent.
Previously officials had forecast inflation to fall to 2.6 percent, back within the target range, by mid-2026 but now they forecast inflation will be 3.2 percent at that stage and only fall to 2.6 percent at end-2026. Officials, however, expect that the trimmed mean measure of inflation will be back within the target range a year sooner than the headline rate, forecasting it to fall from 3.5 percent at end-2024 to 2.9 percent at end-2025 and 2.6 percent at end-2026.
The RBA's forecast for headline inflation in the second half of 2024 largely reflects the expected impact of government measures to reduce housing and energy costs rather than any reduction in underpaying price pressures. Further ahead, the higher inflation forecast reflects expectations for stronger government spending and a recovery in consumer spending but also an assessment that"the economy's capacity to meet this demand is less than previously thought".
These forecasts are based on an assumption that policy rates, in line with market expectations, have peaked at their current level and will remain around that level for the rest of the year before falling to around 3.6 percent by end-2025 and 3.3 percent by end-2026. 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 believe that the rate trajectory priced in by markets will not result in headline inflation returning to its target range over the next two years.
This suggests that officials may conclude that the rate cuts currently priced in by markets will leave policy too loose to return inflation to the target range quickly enough. Officials stressed today that policy"will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range".
Since the RBA's previous assessment, published in early April, monthly data have shown an increase in headline inflation from 3.6 percent in April to 4.0 percent in June before easing again to 3.8 percent in May. Quarterly headline inflation rose but underlying measures moderated in the three months to June.
Reflecting these developments, officials have revised their near-term inflation forecasts lower but revised up their medium-term forecasts. This has pushed back their forecast for when they expect inflation to return to its target range. Headline inflation is now forecast to be 3.0 percent at end-2024, compared with the previous forecast of 3.8 percent, and then rise to 3.7 percent at end-2025, up significantly from the previous forecast of 2.8 percent.
Previously officials had forecast inflation to fall to 2.6 percent, back within the target range, by mid-2026 but now they forecast inflation will be 3.2 percent at that stage and only fall to 2.6 percent at end-2026. Officials, however, expect that the trimmed mean measure of inflation will be back within the target range a year sooner than the headline rate, forecasting it to fall from 3.5 percent at end-2024 to 2.9 percent at end-2025 and 2.6 percent at end-2026.
The RBA's forecast for headline inflation in the second half of 2024 largely reflects the expected impact of government measures to reduce housing and energy costs rather than any reduction in underpaying price pressures. Further ahead, the higher inflation forecast reflects expectations for stronger government spending and a recovery in consumer spending but also an assessment that"the economy's capacity to meet this demand is less than previously thought".
These forecasts are based on an assumption that policy rates, in line with market expectations, have peaked at their current level and will remain around that level for the rest of the year before falling to around 3.6 percent by end-2025 and 3.3 percent by end-2026. 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 believe that the rate trajectory priced in by markets will not result in headline inflation returning to its target range over the next two years.
This suggests that officials may conclude that the rate cuts currently priced in by markets will leave policy too loose to return inflation to the target range quickly enough. Officials stressed today that policy"will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range".
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.
