SYDNEY: Australia's central bank on Tuesday sharply raised its outlook for headline inflation and removed any chance of a rate cut from its forecasts this year, suggesting borrowers might see no rate relief until well into 2025.
Reacting to a disappointingly high inflation reading for the first quarter, economists at the Reserve Bank of Australia predicted inflation would only slow as hoped if rates stayed at 4.35 per cent for longer.
"The cash rate is assumed to remain around its current until mid-2025, around nine months longer than assumed in February," the RBA said in its quarterly Statement on Monetary Policy.
The RBA's economists now expect consumer inflation, which was running at 3.6 per cent in the first quarter, to pick up to 3.8 per cent by June and stay there until the end of the year. That compared with the previous forecast of it slowing to 3.2 per cent by end-2024.
That factors in a labour market that is proving tighter than expected with unemployment rate not far from 50-year lows at 3.8 per cent. That is expected to climb to 4.0 per cent by June and 4.2 per cent by December, lower than the previous forecasts of 4.2 per cent and 4.3 per cent.
High fuel prices and the unwinding of government energy rebates are also part of the reasons that inflation will stay elevated this year.
"There may be less spare capacity in the economy than we currently judge," said the RBA in a 60-page document. "There is a risk that the forecast easing in the labour market is not sufficient to return inflation to target if we have misjudged the degree of spare capacity."
Still, the RBA judged inflation was still expected to be back in the 2-3 per cent target range in late 2025, but that's only because those forecasts are based on market pricing of no rate cuts until mid-2025.
The RBA noted there had been a drastic shift in the technical assumptions that the forecasts were based on, as markets reacted to the disappointingly high inflation release.
Policymakers are widely expected to hold interest rates steady on Tuesday at 4.35 per cent for a fourth meeting, but the focus is on whether the central bank will reinstate a tightening bias after just removing it in March.
The RBA still judged disinflation would continue, with the trimmed mean measure easing to 3.8 per cent by June and 3.4 per cent by the year-end.
Investors have already abandoned any hopes of policy easing this year after data showed that the labour market was only easing gradually and continued progress in the retreat of inflation stalled in the first quarter.
The risk now lies with another rise in interest rates, with swaps implying a 40 per cent probability of another quarter-point rise by September.
Reflecting weak consumer spending, the economy is expected to remain subdued over the most of the year, expanding at an annual 1.2 per cent pace in the June quarter this year, down from 1.3 per cent previously.
Growth for end 2024 was lowered to 1.6 per cent, from 1.8 per cent, while the forecast for late 2025 and June 2026 remained roughly the same around 2.4 per cent. - Reuters