RBA Upgrades Growth, Employment Outlook But Sees Slow Progress On Inflation, Wage Growth

• Published on
• 07 May 2021, 11:32 AM

By Sophia Rodrigues

(Sydney, May 7, 2021)— The Reserve Bank of Australia made significant upgrades to growth and labor data forecasts to account for the transition in the economy to expansion phase from recovery but expects wages growth and inflation to rise very slowly.

As a result, the RBA maintained its forward guidance that the cash rate would be maintained until 2024 at the earliest. However, to account for the upside scenario of a sharper fall in the unemployment rate and rise in wage prices, the RBA said conditions that will lead to a rate hike consideration is “unlikely” to be met until 2024 at the earliest, rather than the fact that it “does not expect” such conditions to be met until 2024 at the earlier.

The RBA’s baseline scenario sees the unemployment rate falling to 4.5% by June quarter 2023, from 5.25% forecast at the February Statement on Monetary Policy. Inflation is expected to rise to 2% from 1.75% previously expected and trimmed mean inflation also to 2% from 1.75%.

Like in recent SOMP’s the RBA also provided upside and downside scenarios. In the upside scenario, the RBA is forecasting the jobless rate to fall 3.75% by June 2023, and trimmed mean inflation to 2.25% by June 2023.

If the upside scenario is met, there might be a case for a hike in the cash rate by the end of 2023 or in early 2024.

In the downside scenario, the unemployment rate is expected to rise to 5.5% in June 2023 from an expected 5.25% in the June 2021 quarter. The downside scenario sees trimmed mean inflation at 1.5% by June 2023.

A key difference between upside and downside scenario is expectations for stronger and weaker household consumption.

Overall, the RBA expects growth in activity to be broad-based in the period ahead, led by the household sector and public demand. The RBA has also noted that a pick-up in business investment is now underway and expected to continue, supported by strong balance sheets, rising business confidence, and a steady decline in both spare capacity and general uncertainty.

The RBA slightly lowered its forecast for near-term growth in public investment but expects a quick pick-up in subsequent quarters. The forecast for public consumption has been upgraded to incorporate some expected additional spending related to the vaccination program.

Other pandemic-related spending is expected to decline across the forecast period, but is offset by expected public consumption commitments stemming from longer-term factors such as the ageing population, the RBA said.

--Contact: Sophia@centralbankintel.com