RBA August 2022 Meeting

The Board’s top priority is to get inflation back to between 2% and 3% over time while keeping the economy steady. The path to this balance is narrow and full of volatility, not least because of what’s going on around the world. The outlook for global economic growth has been reduced since higher inflation, monetary tightening policy in most countries, Russia’s invasion of Ukraine, and China’s COVID containment measures are now all putting pressure on real incomes.

RBA on the Australian Economy

Australia’s inflation is at its highest level since the early 1990s. In the year leading up to the June quarter, headline inflation was 6.1%, while underlying inflation was 4.9%. A lot of the rise in inflation can be attributed to things that happen outside of the Australia, but domestic factors are also playing a role. Strong demand, a tight job market, and limited production capacity in some parts of the economy are all pushing prices up. This year’s floods are also making some prices go up or down.

The rate of inflation is expected to reach its highest point later this year and then fall back to the 2–3% range. Inflation is expected to slow down because global supply-side problems are being solved, commodity prices are becoming more stable, and rising interest rates are playing a role. Inflation expectations for the next few years are still well-grounded, and it’s important that this stays the case. The RBAs main prediction is that CPI inflation will be around 7.4% in 2022, a little over 4% in 2023, and around 3% in 2024.

The Australian economy is expected to keep growing quickly this year, but the rate of growth is expected to slow down after that. Employment is growing quickly, spending by consumers has been steady, and business investment is on the rise. The terms of trade are at a record high, which is also helping the national income. The RBAs main prediction is that GDP will grow by 3.4% by 2022 and by 1.4% in each of the two years after that.

The job market is still tighter than it’s been for a long time. In June, the unemployment rate went down even more, to 3.5%, which is the lowest it has been in almost 50 years. Both the number of open jobs and the number of job ads are at very high levels, and it is expected that unemployment will go down even more in the coming months. As the economy grows less quickly, unemployment is likely to rise further. The RBAs main prediction is that by the end of 2024, the unemployment rate will be around 4%. As companies compete for workers in a tight labour market, our liaison programme and business surveys continue to show that wage growth will pick up from the low rates of the past few years.

The way people spend money continues to be a major source of uncertainty. Higher inflation and interest rates are making it harder for people to make ends meet. Consumer confidence has also gone down, and after big increases in the past few years, housing prices are going down in some markets. In the opposite direction, people are finding jobs and getting more hours. Many families have also saved a lot of money, and the rate of saving is still higher than it was before the pandemic. When deciding how to set monetary policy, the Board will pay close attention to how these different things balance out.

The rise in interest rates today is another step towards normalising Australia’s money situation. In the past few months, the Australian government has had to raise interest rates to bring inflation back to its target and create a more stable balance between supply and demand in the economy. In the coming months, the Board plans to take more steps towards normalising money conditions, but it does not have a set plan. The size and timing of future interest rate hikes will depend on the data that comes in and how the Board thinks inflation and the job market will do in the future. The Board is committed to doing whatever it takes to make sure that Australia’s inflation goes back to where it should be over time.