SoMP Stresses Uncertainties When It Comes To Inflaiton

A mark higher in the RBA’s near-term inflation forecasts is tempered by a resultant mark down in its inflation forecasts for ’24, with trimmed mean inflation now expected to fall back into the upper end of the Bank’s target band by the end of ’24, while headline inflation is expected to the same by mid ’25 (as we learnt on Tuesday).

• The Bank notes that “the forecast decline in inflation is subject to a number of uncertainties. Although goods inflation is expected to ease in line with the easing of global cost pressures, the timing and pace of this could differ from the expected trajectory. If global goods prices reverse some of their recent increases, goods inflation in Australia could decline further and faster than currently envisaged. Working in the other direction, given the current tightness in the labour market, there are upside risks to wages growth, which would boost domestically sourced inflation. Price- and wage-setting behaviour could become more sensitive to strong demand and high inflation, given that households and firms may be more attentive to rising costs when inflation is high for a time. Longer term inflation expectations remain anchored, but it is possible they could move higher. If that were to occur, it would make the task of bringing inflation down harder.”
• Unemployment expectations were unchanged, with no meaningful movement in GDP growth expectations.
• On recent cash rate moves it notes that “maintaining a steady pace of increases over several months has given the Board the time to assess the flow of incoming data and any shifts to the outlook that it may imply.
• The Bank then rounded off with a reaffirmation of its guidance, after reiterating that it is mindful of the considerable adjustment already seen in interest rates and the variance of household abilities in dealing with the current headwinds.