At its meeting today, the Board decided to raise the cash rate target by 25 basis points to 2.85 percent. It also raised the interest rate on foreign exchange settlement balances by 25 basis points to 2.75 percent.
As in most countries, inflation in Australia is too high. In the year to September, the CPI inflation rate was 7.3%, the highest it has been in more than three decades. Global factors explain much of this high inflation, but strong domestic demand relative to the economy’s ability to meet that demand also plays a role. Returning inflation to target requires a more sustainable balance between demand and supply.
A further rise in inflation is expected over the coming months, with inflation now forecast to reach around 8% by the end of the year. Inflation is then expected to ease next year due to continued resolution of global supply-side issues, recent declines in some commodity prices and slower demand growth. Medium-term inflation expectations remain well anchored, and it is important that they remain so. The Bank’s central forecast is for CPI inflation to be around 4¾ per cent in 2023 and just above 3 per cent in 2024.
The Australian economy continues to grow solidly, with domestic incomes boosted by record terms of trade. Economic growth is expected to moderate over the coming year as the global economy slows, the rebound in spending on services runs its course, and household consumption growth slows due to more restrictive financial conditions. The central bank’s forecast for GDP growth has been revised down slightly, with growth of around 3% expected this year and 1½% in 2023 and 2024.
The labor market remains very tight, with many companies struggling to hire workers. The unemployment rate held steady at 3.5% in September, around the lowest rate in nearly 50 years. Job openings and job openings are at very high levels, although employment growth has slowed in recent months as excess capacity in the labor market has been absorbed. The central forecast is for the unemployment rate to remain around its current level in the coming months, but to rise gradually to just above 4% in 2024 as economic growth slows.
Wage growth continues to pick up from the low rates of recent years, although it remains lower than in many other advanced economies. A further upturn is expected due to the tight labor market and rising inflation. Given the importance of avoiding a price-wage spiral, the Council will continue to pay close attention to both the evolution of labor costs and the pricing behavior of companies in the coming period.
Price stability is a prerequisite for a strong economy and a sustained period of full employment. Given this, the Board’s priority is to return inflation to the 2-3% range over time. It aims to do this while keeping the economy on an even keel. The path to achieving this balance remains narrow and clouded by uncertainty.
One source of uncertainty is the outlook for the global economy, which has deteriorated in recent months. Another is how household spending in Australia is responding to tighter financial conditions. The Council recognizes that monetary policy works with a lag and that the full effect of rising interest rates has yet to be felt on mortgage payments. Higher interest rates and higher inflation are putting pressure on the budgets of many households. Consumer confidence has also fallen and house prices have been falling after previous big increases. Working in the other direction, people are finding work, working more hours and earning higher wages. Many households have also built up large financial cushions and the savings rate remains higher than before the pandemic.
The Board has raised interest rates substantially since May. This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help bring inflation back to target. The Board expects to raise interest rates further over the coming period. It is closely monitoring the global economy, household spending, and wage and price setting behavior. The size and timing of future interest rate increases will continue to depend on incoming data and the Board’s assessment of the outlook for inflation and the labor market. The Council remains resolute in its determination to return inflation to target and will do whatever is necessary to achieve this.