Source link – Reserve Bank of Australia

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to
3.10 per cent. It also increased the interest rate on Exchange Settlement balances by
25 basis points to 3.00 per cent.

Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors
explain much of this high inflation, but 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. Medium-term inflation expectations remain well anchored, and it is
important that this remains the case. The Bank’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.

The Australian economy is continuing to grow solidly. Economic growth is expected to moderate over the
year ahead as the global economy slows, the bounce-back in spending on services runs its course, and
growth in household consumption slows due to tighter financial conditions. The Bank’s central
forecast is for 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. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close
attention to both the evolution of labour costs and the price-setting behaviour of firms in the period
ahead.

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.

The Board recognises that monetary policy operates with a lag and that the full effect of the increase in
interest rates is yet to be felt in mortgage payments. Household spending is expected to slow over the
period ahead although the timing and extent of this slowdown is uncertain. Another source of uncertainty
is the outlook for the global economy, which has deteriorated. The Board is seeking to keep the economy
on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of
potential scenarios. The path to achieving the needed decline in inflation and achieving a soft landing
for the economy remains a narrow one.

The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set
course. It is closely monitoring the global economy, household spending and wage and price-setting
behaviour. The size and timing of future interest rate increases will continue to be determined by the
incoming data and the Board’s assessment of the outlook for inflation and the labour market. The
Board remains resolute in its determination to return inflation to target and will do what is necessary
to achieve that.



Source link – Reserve Bank of Australia