NewsRBA warns that there will be at least 2 more rate increases in the coming months
The Reserve Bank has indicated that it will continue to raise rates until it has reigned inflation - even though this means less economic growth and income per person not growing for many years.
Peter Martin is not affiliated with any company or organization that would be a benefit from this article. He has not disclosed any relevant affiliations, other than their academic appointment.
After the Reserve Bank raised interest rates nine times in a row, Australia's cash rate hit 3.35%. This was a sign of more rate pain ahead. A 0.25 percentage point increase adds A$90 per month to a $600,000. variable mortgage.
This was the view of money market traders, who had priced loans based on the assumption that the bank's cash rates would rise just 0.35 point further after being raised to 3.35% on Tuesday. Then, it plateaued and then fell.
Within minutes, traders adjusted prices to a peak cash rate of 3.9% rather than 3.7%. This coincidentally was close to the average forecast of participants from The Conversation's economic survey at week's start.
It released a preview of its full set forecasts on Friday. It said that it expected inflation to fall from 7.8% to 4.74% by end of this year and to around 3.3% by mid-2025. This is in line with the predictions of the Conversation's panel." We can now say, for the first time," he said to a press conference. To emphasize the point, he used "disinflation' ten times more in 44 minutes.
Powell's work has also helped to reduce inflation. The Federal Funds Rate (similar to the Reserve Bank cash rate) in the US has risen from almost zero to 4.5% in a year. This has affected consumer spending.
The Bureau of Statistics released Monday's figures in Australia. They show that spending fell in the three months to December. Not in absolute dollars, as December is always a big year, but in comparison to what would have been expected at the end of the calendar year.
Inflation has been held up in the US and UK, but not in Australia. This has led to very high wages growth. Higher wages have resulted in higher prices being baked into higher wages. This has led to higher prices which in turn have led to higher wages.
Australia's Prime Minister Paul Keating led the way to enterprise bargaining in the 1990s. This locked many people into wage agreements that are only reached once every three years and are not able to quickly respond to changes in prices.
It predicts that GDP growth will slow to 1.5% in 2023 and 2024. This is a worse forecast than the International Monetary Fund, which projects an economic growth rate of 1.6% this year, rising to a historic low 2.2% by 2026.
The Conversation forecasters predict 1.7% and then 2.5%.This would mean that the economic resources required by Australian governments to provide the services we need (such as to achieve net zero emissions and to combat climate change) will be more difficult to find.
Chalmers will publish a revised tax expenditures statement later this month. It will outline the potential to wind back tax cuts, including those that are for profits from high-end family home sales. Chalmers claims he is not considering this, but the IMF recommended it.
