SYDNEY — The Reserve Bank of Australia continues to warn that while inflation pressures have peaked, the risks that inflation remains higher for longer are significant and further interest-rate increases may be needed.
In its latest monetary-policy statement released Friday, the Australian central bank said that while inflation expectations are consistent with price pressures returning to target by mid-2025, a continuation of that is not yet assured.
Stubborn services price inflation and the risk that wages grow by more than expected in an economy where productivity growth has been negligible for three years is ensuring that the RBA remains cautious about inflation risks.
“The longer inflation remains above target, the greater the risk that inflation expectations rise and price and wages setting behavior might adjust accordingly,” the RBA said.
“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce late,” the RBA added.
“Some further tightening of monetary policy may be required,” the RBA said.
The comments come after the RBA announced a further rise in the official cash rate this week to 3.85% from 3.60%. It was the 11th rise by the bank since May 2022, with RBA Gov. Philip Lowe saying the hike was needed because inflation remains too high.
Mr. Lowe said this week that the decision to raise interest rates had the broad backing of the RBA’s policy-setting board.
Despite the hawkishness of the statement, the RBA revised down its near-term inflation forecasts. It now expects an inflation rate of 4.5% through 2023, down from an earlier forecast of 4.75%. Inflation was running at 7.0% in the first quarter.
The RBA revised up its forecasts for unemployment. It now expects the jobless rate to be 4.0% by the end of this year, up from a prior forecast of 3.75%. The faster-than-expected rise in unemployment is in line with a weaker outlook for gross domestic product growth, which is set to slow to just 1.25% for 2023.
The absence of productivity growth in the economy over recent years remains a key concern of the central bank, saying it could result in more stubborn inflation than expected, while sharply rising rents will also keep upward pressure on prices, it said.
Persistent global inflation is a further concern, with the RBA fearing the same trends won’t play out in Australia.
“Services price inflation is turning out to be more persistent than expected in some other advanced economies, and it is possible that this experience could be repeated in Australia,” the RBA said.
