RBA’s Upside Scenario Sees Inflation Below 2% By Mid-2023; Baseline Is 1.75%

• Published on
• 09 Feb 2021, 01:46 PM

(This story was first published around 1130 am on Friday, February 5, 2021 as an email to premium subscribers)

By Sophia Rodrigues

A very interesting observation in the RBA’s forecasts in the February Statement on Monetary Policy is that there is barely any difference in the inflation forecast in the baseline vs upside scenario.

In the upside scenario, the jobless rate falls to 4.75% by the end of 2022 and marginally below that in 2023. Wages growth is expected to be slightly above 2% in early 2023 but inflation is still expected to be below 2% by the end of the forecast period in mid-2023.

In the upside scenario, the expectation is a sustained run of positive health outcomes enables the remaining restrictions on activity to be eased more quickly. There would be a stronger rebound in consumer and business confidence, as well increased opportunities for services consumption, including interstate travel. Household consumption would be boosted by them drawing down on savings accumulated over the past year. The scenario assumes that over the next year and a half, households consume around 40% of the unplanned savings accumulated over the June and September quarters of 2020.

The scenario also assumes faster-than-expected progress on overseas vaccination programs and more rapid control of virus outbreaks internationally.

Among upside risks are a more rapid rollout of public investment presents an upside risk to the forecasts given the intent of governments to ensure the timely rollout of capital spending programs. The RBA has noted that governments have collectively announced a large increase in capital spending over the year to June 2021.

--Contact Sophia@centralbankintel.com