Punters on Tuesday were far less focused on the Reserve Bank of Australia’s (RBA) movements than usual, as the bank’s decision to maintain interest rates was more predictable than the outcome of the Melbourne Cup. Most Australians are more concerned with their home loan interest payments or savings rather than betting on the winning horse.
The Reserve Bank’s decision to keep rates on hold this week was expected, resulting in a less crowded press conference with Governor Michele Bullock. However, the more intriguing news came from the bank’s views on price pressures within the economy.
Inflation Concerns Resurface
Over the past year, Treasurer Jim Chalmers and the Reserve Bank had started to put their concerns about inflation behind them. Chalmers often highlighted that “inflation now has a two in front of it.” Yet, the latest figures released last week surprised many. Inflation rose to 3.2% over the 12 months to September, the highest rate since June of last year.
Even the trimmed mean inflation, a measure closely monitored by the RBA that excludes the largest price changes, increased to 3%, reaching the upper limit of the bank’s 2-3% target range. Governor Bullock expressed dissatisfaction with these results, stating,
“[Inflation] just below three [per cent] is not good enough for the board.”
Consequently, Australian borrowers may need to abandon hopes for interest rate relief until inflation aligns more closely with the target range.
Forecasts and Economic Projections
According to the RBA’s latest forecasts, inflation is expected to continue rising until mid-next year, peaking at 3.7% (and 3.2% in trimmed mean terms) by June. This is unwelcome news for households facing rising bills and significant home loan repayments. However, the RBA attributes these pressures to temporary or one-off factors, suggesting they may not persist long-term, barring unforeseen events.
The bank’s projections reflect the ongoing impact of the unexpected inflation surge in September, which will be factored into the annual inflation calculation for the coming year. As the RBA describes it, there will be a “hump” in the annual inflation figure until the September anomaly is phased out of the calculation.
Temporary Factors Driving Inflation
Bullock noted that some of the inflation increase in the three months to September was driven by temporary factors, such as higher travel and fuel costs, and a rise in council rates, which are typically set in July or August. The most significant jump, excluded from the trimmed mean measure, was in electricity prices due to the expiration of state energy rebates, increasing costs for households.
By the end of this year, federal electricity rebates will also end, potentially leading to another rise in electricity prices early next year unless extended by the government. Some households may receive a double rebate in October due to delays, partially offsetting these increases.
Market Dynamics and Labor Concerns
Despite these challenges, the RBA anticipates that once the September inflation spike and energy rebate volatility subside, the annual inflation rate will stabilize. By the end of next year, the RBA forecasts inflation will ease to 2.7%.
However, the bank acknowledges the potential for unexpected events to alter these projections. One concern is the gap between supply and demand, a critical factor in price pressures. The RBA worries that demand may be stronger than previously estimated, particularly in housing and services, and due to the robust job market.
While the unemployment rate rose to 4.5% in September, the highest in nearly four years, it remains historically low. The RBA also monitors other employment indicators, such as the underemployment rate and job quit rates, which suggest continued labor market tightness.
Managing Expectations
The RBA is keen to manage public expectations regarding inflation. The bank emphasizes that the recent inflation uptick and projected growth are not causes for alarm. Part of this strategy involves keeping inflation expectations in check to prevent a self-fulfilling cycle of rising prices.
If Australians anticipate faster price growth, they may act in ways that exacerbate inflation, such as demanding higher wages, businesses increasing prices, and consumers accelerating their spending. These behaviors could further complicate the RBA’s efforts to control inflation.
The Reserve Bank’s cautious approach reflects a broader strategy to maintain economic stability while navigating the complexities of temporary price pressures and labor market dynamics. As the situation evolves, the bank remains vigilant, ready to adjust its policies to ensure long-term economic health.
