Interest Rates & The State of the Economy
At its meeting today, the Board of the Reserve Bank of Australia (RBA) decided to increase the cash rate by 25 basis points to 3.10 per cent.
There has been a substantial cumulative increase in interest rates since May. This has been necessary to ensure that the current period of high inflation is only temporary. High inflation damages our economy and makes life more difficult for people. The Board’s priority is to re-establish low inflation and return inflation to the 2–3 per cent range over time.
Inflation in Australia is currently at 6.9 per cent over the year to October. There are many global factors to explain this high rate of inflation, however strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply.
A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand. The RBA's central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.
It is likley that once we see inflation declining or stable, interest rates will also stabilise putting a floor to declining property values and the bottom of the property cycle.
The Australian economy is continuing to grow solidly. Economic growth is expected to moderate over the year ahead as the global economy slows. The RBA is forecasting growth of around 1½ per cent in 2023 and 2024.
The labour market remains very tight, with many firms having difficulty hiring workers. The unemployment rate declined to 3.4 per cent in October, the lowest rate since 1974. Job vacancies and job ads are both at very high levels, although they have declined a little recently. Employment growth has also slowed as spare capacity in the labour market is absorbed. Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation.