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The Reserve Bank of Australia said it will need to raise interest rates further as unemployment is forecast to fall to the lowest level since 1974, boosting wage growth and underpinning consumer price growth.

Both headline and core inflation are forecast to remain above the 2%-3% target this year and next, before tapering to 2.9% by the end of the forecast period in June 2024, the RBA said in a statement. its Monetary Policy Statement on Friday. The cash rate is supposed to be 1.75 percent at the end of the year and 2.5 percent at the end of next year, he said.

“Higher labor costs in response to a tight job market are expected to become the main driver of inflation outcomes later in the forecast period,” the RBA said. Companies “now report that they are paying higher wage increases or that they expect substantially higher wage growth over the next year.”

A tight labor market will keep inflation higher, says the RBA. Credit:louis kennerley

Australia’s economy is growing in response to fiscal and monetary stimulus during the pandemic and, like much of the developed world, policymakers are grappling with a bout of inflation. The central bank raised rates 25 basis points more than expected on Tuesday as Governor Philip Lowe switched to a more dovish outlook, just ahead of the Federal Reserve’s half-point hike.

Economists expect the bank to continue to rise this year, with Goldman Sachs Group Inc. forecasting the benchmark index to be 2.6 percent by the end of the year. The RBA has forecast the economy to expand 4.2 percent this year, slowing to 2 percent by the end of 2023, as the reduction in stimulus weighs on growth, the quarterly update showed.

Unemployment is estimated at about 3.5 percent in early 2023, the lowest level since 1974, and will remain “around that level thereafter,” the bank said. He said reopening the border could, over time, help alleviate labor shortages in some industries while increasing demand in the economy.

“The expansion is likely to be driven by strong consumption growth as spending on discretionary goods and services continues to recover, supported by strong household balance sheets and high real household disposable income, despite rising prices. ”, said the RBA.

The central bank highlighted that China’s lockdowns to combat the coronavirus will add to existing pressures on global supply chains, while Russia’s war against Ukraine remains a major source of uncertainty.

Still, he said, high commodity prices resulting from the conflict will boost national income in Australia and will likely see terms of trade hit a new peak in the first half of this year.


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