• The RBA raised its predictions for core inflation and wage growth on Friday.
• It cautioned that additional rises in interest rates would be necessary.
• The RBA tightened the cash rate for the ninth time in a row on Tuesday.

The Reserve Bank of Australia (RBA) raised its predictions for core inflation and wage growth on Friday and cautioned that additional rises in interest rates would be necessary to prevent a harmful wage-price spiral.

The RBA stated in a hawkish-sounding quarterly Statement on Monetary Policy that domestically sourced cost pressures were continuing to heat up even if consumer price inflation may have finally peaked last quarter.

While the increase in global goods prices had slowed, this had not yet become apparent in Australia, and inflation in the services sector had increased more quickly than anticipated.

“The Board expects that further increases in interest rates will be needed to ensure that the current period of high inflation is only temporary,” said the RBA, implying two or more hikes were waiting in the wings.

“The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”

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The RBA tightened the cash rate for the ninth time in a row on Tuesday, raising it to a new ten-year high of 3.35%, totaling an enormous 325 basis points since last May.

Additionally, it caught the markets off guard by indicating that more hikes were necessary, ending talk of pausing, and prompting a significant upward revision in market expectations for terminal rates to 4%.

Consumer price inflation is currently at a 32-year high of 7.8% and is only anticipated to decline slightly, from 6.3% to 6.7% by June of this year. Then, by the middle of 2025, it should have slowed to the top of the RBA’s goal range of 2-3%.

When compared to an earlier prediction of 5.4%, the carefully watched trimmed mean measure of inflation will only slow to 6.2% by the middle of this year.

After slowing to 3.9% in the previous estimate, annual salary growth is predicted to rise up to a peak of 4.2% at the end of this year before dropping down to 3.8% by the middle of 2025.

By mid-2025, the unemployment rate is projected to gradually rise from its current 3.5% level to 4.4%.

All these forecasts are based on the technical assumption that interest rates peak at around 3.75% in mid-2023 before easing back to around 3% in June 2025.

In addition, the bank increased its estimate of this year’s economic growth from 1.4% to 1.6%. The rapid removal of Covid limitations by China has increased global demand, boosting Australia’s terms of trade and gross domestic product.

The RBA added that even if some people are feeling a harsh strain on their budgets due to increasing interest rates and the rising cost of living, the momentum in household consumption growth may be maintained for longer than anticipated.

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