SYDNEY — The Reserve Bank of Australia remains confident that it will tame inflation over the coming years, bringing it back within the desired 2% to 3% target band by the end of 2025.
The RBA’s latest set of forecasts predict that the annual rate of inflation will be running at 2.75% by the end of 2025, with consumer price pressures expected to cool rapidly through 2024, and end that year at 3.25%.
Inflation peaked at an annual rate of more than 8.0% in 2022, but has since eased back to come in at 6.0% on year in the second quarter.
“The board’s current assessment is that the risks around the inflation rate are broadly balanced,” the RBA said in its latest statement on monetary policy on Friday.
The RBA has toned down its narrative about the economic outlook when compared with its statement three months ago. In May, it warned that there would be little tolerance if inflation were to edge higher.
The updated outlook is consistent with the central bank’s decision to hold interest rates steady for a second month in a row at its policy meeting earlier this week, but it also continues to add that further increases may be necessary to get inflation back to target.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks,” the RBA statement said.
The central bank expects the economy will experience a soft landing, with annual gross domestic product growth slowing to around 1.0% in 2023 before recovering slowly over ensuing years.
At the same time, the unemployment rate is tipped to rise from its current 50-year low of 3.5% to around 4.5% by the end of 2024, before plateauing there.
Trimmed mean inflation, the RBA’s preferred measure, is expected to run at an annual rate of 3.0% by the end of 2024–half the current rate of 6.0%.
While costs for energy and labor are set to rise over the medium term, they are expected to be offset by falling goods price inflation as global supply-chain pressures fall rapidly, the RBA said.
Recent economic data has shown inflation cooling faster than expected in the second quarter, with retail sales volumes contracting over three consecutive quarters, adding weight to the view that the RBA’s rate hikes over the past year are acting to curb demand and bring inflation down.
More market economists are now forecasting that the RBA won’t need to tighten the policy reins any further, leaving the official cash rate at 4.1%. However there are still lingering upside risks to inflation, especially if wage pressures continue to grow.
“The board is also mindful that the typical lags of monetary policy mean that the full effects of the interest rate increases to date on demand, the labor market, and inflation are yet to be seen,” the RBA said.