Australias central bank revises up inflation forecasts as further rate hikes flagged

Australia's central bank revises up inflation forecasts as further rate hikes flagged

SYDNEY, Feb 10 (Reuters) – Australias central bank on Friday revised up its forecasts for core inflation and wages growth and warned further increases in inetrest rates would be needed to head off a damaging wage-price spiral.

In a hawkish-sounding quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) said domestically-sourced cost pressures were still picking even if consumer price inflation was a whole may have finally peaked last quarter.

While growth in global goods prices had cooled this was yet to show clearly in Australia, while inflation in the service sector had climbed faster than expected.

“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.”

On Tuesday, the RBA raised its cash rate for the ninth straight time to a fresh decade-high of 3.35%, bringing the total tightening since last May to a whopping 325 basis points.

It also surprised markets by signalling further increases were needed, quashing talk of a pause and leading markets to sharply revise up their outlook for terminal rates to 4%.

Consumer price inflation is running at a 32-year high of 7.8% and is now expected to only slow to 6.7% by June this year, up from a previous forecast of 6.3%. It should then slow further to the top of the RBAs target range of 2-3% by mid-2025.

The closely-watched trimmed mean measure of inflation will only slow to 6.2% by the middle of this year, compared with a previous forecast of 5.4%.

Annual wage growth is expected to pick up to a peak of 4.2% at the end of this year, compared with the previous forecast of 3.9%, before easing back to 3.8% by mid 2025.

The unemployment rate is expected to steadily increase to 4.4% by mid-2025, from the current 3.5%.

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% to June 2025.

The RBA also noted that the momentum in household consumption growth could be sustained for longer than expected, even as some are experiencing a painful squeeze on their budgets due to higher interest rates and the rising cost of living.

(Reporting by Stella Qiu, Editing by Wayne Cole)