Both headline and core inflation are seen remaining above the 2-3% target this year and next before easing to 2.9% at the end of the forecast period in June 2024, the RBA said in itson Friday. The cash rate is assumed to be 1.75% at year’s end and 2.5% at the end of next year, it said.
“Higher labour costs in response to a tight labor market are expected to become the primary driver of inflation outcomes later in the forecast period,” the RBA said. Firms are “now reporting that they are paying larger wage increases or that they expect materially higher wages growth over the coming year.”
Australia’s economy is surging in response to fiscal and monetary stimulus during the pandemic and, like much of the developed world, policy makers are grappling with an inflation outbreak. The central bank raised rates by a larger-than-expected 25 basis points on Tuesday as Governor Philip Lowe pivoted to a more hawkish outlook, just ahead of the Federal Reserve’s half-point hike.
Economists expect the bank to keep hiking this year, with Goldman Sachs Group Inc. forecasting the benchmark will be 2.6% by year’s end. The RBA forecast the economy will expand 4.2% this year, easing to 2% at the end of 2023 as the reduction of stimulus weighs on growth, the quarterly update showed.
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