MNI POLICY: RBA Eyes Mid-25 Target Return, Unemployment 4-4.5%

The Reserve Bank of Australia would deem its monetary policy successful if inflation returns to its 2-3% target by mid-2025 and the unemployment rate holds between 4-4.5%, MNI understands.

Overseas external factors have largely driven Australia’s elevated inflation and further interest-rate increases, while not off the RBA’s radar, would as conditions now stand do little to change the global situation, which has already begun easing, it considers.

While other countries experienced a sharp uptick in inflation following the supply-side and geopolitical shocks of 2022, Australia has typically lagged and the full impact on electricity prices will not likely be felt until later this year. The RBA’s decision to pause interest-rate hikes at 3.6% on April 4 (see: MNI RBA WATCH: Rates on Hold, Bank Charts Cautious Path) was illustrative of this lag.

But some domestic inflation, such as that noted in the rental market, has been “baked into the cake”. The RBA will monitor inflation from domestic sources closely when the Australian Bureau of Statistics publishes its March quarter consumer price index on April 26.

The RBA’s view is that inflation, particularly segments driven by overseas factors such as energy prices, likely peaked in the December quarter at 7.8%. Both monthly CPI prints since have shown lower numbers. (see: MNI BRIEF: Lower Feb CPI Print Adds to RBA Pause Case). The unemployment rate has remained steady at 3.5% for the last two months.

Following the Reserve’s last meeting, Governor Philip Lowe noted the RBA was comfortable with higher inflation for longer, if it meant gains in the employment market were protected. The RBA expects inflation to remain high until mid-2025.

The Reserve’s strategy, however, would depend on inflation expectations not becoming imbedded domestically, which would force it to move more aggressively.

STRONG DOMESTIC INFLATION

The RBA will monitor domestic inflation to gauge whether expectations are becoming ingrained, despite the “roll off” of inflation overseas.

Key factors leading into the RBA’s next meeting will be wage growth and whether the fall in goods prices is filtering through domestically. The RBA will also watch momentum of prices in the service sector closely.

Unfortunately, several key inflationary factors, such as house rent, are increasing rapidly, thanks to a swift return of immigrants and shrinking of households following the pandemic. The Reserve is currently debating how further interest-rate increases could influence these domestic factors, MNI understands.