Nation still expected to avoid recession, however
In its quarterly Statement on Monetary Policy released on Friday, the Reserve Bank of Australia (RBA) issued a warning that 2023 is expected to be the weakest year for the country's economy outside of the pandemic.
However, despite this gloomy outlook, the nation is still projected to steer clear of a recession, according to a report by The Australian.
The RBA's report revealed that the central bank board had once again considered the possibility of raising interest rates at its recent meeting before ultimately deciding to hold off for a second consecutive month.
Notably, the RBA revised down the forecast for national economic growth this year from 1.25 to 0.9%, The Australian reported. However, economists at the bank also predicted a faster deceleration in inflation, which is expected to prevent a decline in workers' wages throughout 2023.
According to the revised economic outlook, the RBA economists anticipate a slowdown in consumer price growth from 6% to 4.1% by December, which falls well below the previous estimate made in May, where prices were expected to rise by 4.5% throughout 2023.
The RBA further stated that inflation is projected to decrease over the next two years, ultimately falling within the bank's target range of 2-3% by the end of 2025, The Australian reported. This suggests that the RBA's economists believe the country is on track to tame inflation without plunging into a recession.
Despite this positive outlook, the jobless rate is forecasted to rise from its current rate of 3.5% to 4% by December, potentially peaking at around 4.5% a year later. However, the RBA expects employment numbers to continue growing until the end of 2025.
The decision to maintain the cash rate at 4.1% was a close call for the central bank board, according to The Australian. Several economists have recently expressed a belief that further rate hikes were unlikely and that the next move would be a downward adjustment.
Contrary to these expectations, the RBA's latest report indicates that "the board's current assessment is that the risks around the inflation outlook are broadly balanced." The report emphasised that there are potential upside and downside risks to the inflation outlook, citing factors such as stronger-than-expected wage growth, productivity growth not recovering, or widening profit margins due to declining input costs.
Read next: 1.43 million Australians at risk of mortgage stress – report
The report also acknowledged the possibility of global cost pressures declining quicker than assumed, which could result in domestic prices being impacted by weak consumer demand.
The RBA said that the labour market remains tight, contributing to higher pay claims. However, weak productivity growth is also leading to an increase in costs, even as goods inflation slows down, The Australian reported.
The report concluded that the effects of the interest rate increases on demand, the labour market, and inflation are yet to be fully seen, as the impact of monetary policy typically experiences lags. These lags have been amplified by the upcoming transition of approximately 150,000 households from ultra-low fixed mortgage rates in the third quarter of the year.
The RBA acknowledged the financial strain that many households are currently facing, highlighting the high cost of living along with the rapid pace of interest rate increases thus far, The Australian reported.
Have something to say about this story? Let us know in the comments below.
