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RBA revised their estimate of inflation, additional interest rate hikes may be necessary

The Reserve Bank of Australia has updated its inflation projections and predicts that the surge in prices may have peaked, but warns of the potential for a wage-price spiral. The RBA plans to raise interest rates further to control inflation, and while homeowners have savings to cope with rising rates, the bank is concerned about a decline in economic activity.

RBA revised their estimate of inflation, additional interest rate hikes may be necessary

The Reserve Bank of Australia (RBA) has once again revised its inflation projections and believes that the recent surge in prices may have reached its peak.

The central bank updated its near-term projections due to the strong Consumer Price Index (CPI) results for Q4 of 2020 and the possibility of faster wage growth than previously predicted. The RBA reaffirmed its stance that several interest rate hikes may be necessary to keep inflation under control.

The RBA's inflation forecast, which is currently at 6.9%, is estimated to decline to 4.3% by the end of the year, compared to its earlier prediction of 3.8%. It is projected that headline inflation will reduce to 4.8% by year-end, lower than its current level of 7.8%. However, it is unlikely to reach the 2-3% target range of the central bank until mid-2025.

An increase in wages is one of the factors driving prices up, with wages growth projected to reach 4.2% this year, higher than the 3.9% forecast in November of last year. This is due to companies struggling to fill positions in a tight job market and offering larger salaries and incentives.

On Tuesday, the RBA raised the official interest rate for the ninth consecutive time, bringing it to 3.35%, the highest in the past 10 years. The bank may have to raise the rate even higher, over 4%, to curb inflation.

So far, a lot of homeowners have managed have not felt the full impact of the increase in interest rates because of the savings they accumulated during the pandemic. Since the beginning of the pandemic, Australians saved about $300 billion giving them a buffer to cope with the rising interest rates.

The RBA expressed concern in its latest quarterly statement about the potential for a wage-price spiral leading to a prolonged period of high inflation. The central bank will closely monitor the pricing behaviour of firms and the development of labour costs to avoid this scenario. The robust internal demand, tight labour market and supply disruptions from floods are causing a surge in prices. The RBA is still anticipating a decline in economic activity in the coming months due to higher loan costs, rising cost of living and declining wealth causing families to cut spending. The average economic growth is estimated to be of the order of 1.5% in 2023 and 2024.

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