Australia’s central bank, the Reserve Bank of Australia (RBA), has emphasized the need for a revival in productivity to address the country’s inflation slowdown. Despite inflation slowing down, it still remains too high and is expected to take time to reach the bank’s target. Marion Kohler, head of the RBA’s economics unit, stated that inflation is not expected to return to the desired 2-3% range until late 2025, with the midpoint of 2.5% not being reached until 2026.
Consumer price inflation in the December quarter was slightly lower than anticipated at 4.1%, while core inflation dropped to 4.2%. Kohler acknowledged the uncertainty surrounding forecasts for such a long-term perspective. The RBA’s forecast predicts that subdued economic growth will help balance the supply and demand of goods and services in the economy, and labor market conditions will ease into sustained full employment levels.
The central bank recently maintained interest rates at a 12-year high of 4.35% after a quarter-point hike in November. Although the RBA has left the possibility of another hike on the table, financial markets are betting on a potential rate cut as the next move.
Kohler noted that rising mortgage rates, combined with high inflation and historically high tax payments, have been depressing household incomes. Consequently, this has helped bring demand back into better balance with supply in the economy. As a result, economic growth is expected to remain subdued over the next couple of years. Unemployment, currently at 3.9%, is projected to increase but peak at a historically low 4.4% in 2025.
The expected slowdown in inflation will require a recovery in productivity, which has been rather lackluster in recent years. However, Kohler expressed optimism that productivity would improve once temporary factors related to the COVID-19 pandemic played out. She highlighted that risks still remain, and the RBA will continue to closely monitor incoming data.
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In conclusion, the RBA’s call for a revival in productivity to address Australia’s inflation slowdown highlights the ongoing challenges faced by the country’s economy. With inflation expected to take time to return to target, the central bank is closely monitoring the situation while keeping its options open for further policy actions.
