Statement by Philip Lowe, Governor: Monetary Policy Decision | Media announcements | Techy Kings

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The board decided at its meeting today to raise the cash rate by 25 basis points to 2.85 percent. It also raised the rate on foreign exchange settlement balances by 25 basis points to 2.75 percent.

As in most countries, inflation in Australia is too high. In the year to September, CPI inflation was 7.3 percent, the highest it has been in more than three decades. Global factors explain much of this high inflation, but strong domestic demand relative to the economy’s ability to meet that demand also plays a role. Bringing inflation back to target requires a more sustainable balance between demand and supply.

A further increase in inflation is expected in the coming months, with inflation now expected to peak at around 8 percent later this year. Inflation is then expected to ease next year due to the ongoing resolution of global supply-side issues, recent declines in some commodity prices and slower growth in demand. Medium-term inflation expectations remain well anchored and it is important that they remain so. The bank’s central forecast is for CPI inflation to be around 4¾ percent in 2023 and a little over 3 percent in 2024.

The Australian economy continues to grow strongly and national income is boosted by record terms of trade. Economic growth is expected to moderate in the coming year as the global economy slows, the recovery in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions. The bank’s central forecast for GDP growth has been revised down slightly, with growth of around 3 percent this year and 1½ percent in 2023 and 2024.

The labor market is still very tight, with many companies finding it difficult to hire workers. Unemployment was stable at 3.5 percent in September, around the lowest in almost 50 years. Vacancies and job postings are both at very high levels, although employment growth has slowed in recent months as spare capacity in the labor market has been absorbed. The central forecast is for unemployment to remain at current levels in the coming months, but gradually increase to just above 4 percent in 2024 as economic growth slows.

Wage growth continues to pick up from the low pace of recent years, although it remains lower than in many other advanced economies. A further rise is expected due to the tight labor market and higher inflation. Given the importance of avoiding a price-wage spiral, the Board will continue to pay close attention to both labor cost developments and corporate pricing behavior in the coming period.

Price stability is a prerequisite for a strong economy and a sustained period of full employment. With this in mind, the board’s priority is to return inflation to 2–3 percentage range over time. They try to do this while keeping the economy on an even keel. The path to achieving this balance remains narrow and clouded by uncertainty.

One source of uncertainty is the outlook for the world economy, which has deteriorated in recent months. Another is how household spending in Australia is responding to the tighter economic conditions. The board realizes that monetary policy works with a lag and that the full effect of the interest rate increase cannot yet be felt in mortgage payments. Higher interest rates and higher inflation put pressure on many households’ budgets. Consumer confidence has also fallen and housing prices have fallen after the previous large increases. By working the other way around, people find jobs, get more hours of work and earn higher wages. Many households have also built up large financial buffers and the savings rate is still higher than it was before the pandemic.

The board has raised interest rates significantly since May. This has been necessary to create a more sustainable balance between demand and supply in the Australian economy to help inflation return to target. The board expects to raise interest rates further in the coming period. It closely monitors the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by incoming data and the board’s assessment of inflation prospects and the labor market. The Board remains resolute in its determination to return inflation to target and will do whatever is necessary to achieve this.

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