As it happened: Wall St rout triggers $50b ASX wipeout

The Reserve Bank of Australia said it will need to raise interest rates further as unemployment is forecast to drop to the lowest level since 1974, fuelling wages growth and underpinning consumer-price growth.

Both headline and core inflation are seen remaining above the 2-3 per cent target this year and next before easing to 2.9 per cent at the end of the forecast period in June 2024, the RBA said in its Statement on Monetary Policy Friday. The cash rate is assumed to be 1.75 per cent at year’s end and 2.5 per cent at the end of next year, it said.

“Higher labor costs in response to a tight labor market are expected to become the primary driver of inflation outcomes later in the forecast period,” the RBA said. Firms are “now reporting that they are paying larger wage increases or that they expect materially higher wages growth over the coming year.”

Australia’s economy is surging in response to fiscal and monetary stimulus during the pandemic and, like much of the developed world, policy makers are grappling with an inflation outbreak. The central bank raised rates by a larger-than-expected 25 basis points on Tuesday as Governor Philip Lowe pivoted to a more hawkish outlook, just ahead of the Federal Reserve’s half-point hike.

Economists expect the bank to keep hiking this year, with Goldman Sachs Group Inc. forecasting the benchmark will be 2.6 per cent by year’s end. The RBA forecast the economy will expand 4.2 per cent this year, easing to 2 per cent at the end of 2023 as the reduction of stimulus weighs on growth, the quarterly update showed.

Unemployment is seen at around 3.5 per cent in early 2023, the lowest level since 1974, and remain “around that level thereafter,” the bank said. It said reopening of the border could, in time, help alleviate labor shortages in some industries, while also adding to demand in the economy.

“The expansion is likely to be driven by robust consumption growth as spending on discretionary goods and services continues to recover, underpinned by strong household balance sheets and high real household disposable income, despite rising prices,” the RBA said.

The central bank highlighted that China’s lockdowns to combat the coronavirus will add to existing pressures on global supply chains, while Russia’s war on Ukraine remains a major source of uncertainty.

Still, it said, the resulting high commodity prices driven by the conflict will boost national income in Australia and probably see the terms of trade reach a new peak in the first half of this year.

Bloomberg