Australia to raise key rate - survey

It is hoping to avoid a recession

Australia to raise key rate - survey

by Cynthia Li

Australia’s central bank will raise interest rates three more times and then pause from mid-2023 as it tries to slow demand and consumer prices without triggering a recession, economists say.

The Reserve Bank will lift its cash rate to 3.6% by June, the median estimate of 35 analysts in a Bloomberg survey showed, up from last month’s forecast terminal rate of 3.35%. The key change in between was the release of stronger-than-expected inflation data.

“To date, the economy has remained very resilient despite high inflation and a rapid increase in interest rates,” said Alan Oster, chief economist at National Australia Bank Ltd. 

“However, there are some very early signs of a slowing with labour demand indicators, forward looking measures in the business survey and high frequency indicators of consumption easing. Higher mortgage rates are expected to begin flowing through more clearly in coming months.”

The RBA is in the midst of its sharpest tightening cycle in a generation, having raised rates by 2.75 percentage points since May as it join global counterparts in trying to rein in inflation. 

Yet Australian policy makers have also set themselves apart, downshifting to quarter percentage-point increases over the past two months as they also aim to bring the economy in for a soft landing. The key rate currently stands at 2.85%, the highest level since April 2013.

Economists also raised their inflation outlook through 2024, following a third-quarter CPI reading of 7.3%, the fastest pace since 1990. The survey showed consumer prices are expected to rise 5.1% in 2023, up from 4.5% seen last month, and by 3% the following year versus a prior 2.7%.

The RBA aims to keep inflation between 2-3% on average over time. It forecasts CPI will peak at 8% in the current quarter and then begin to decelerate next year. 

Economists also lowered their forecasts for economic growth in Australia through 2024 to reflect the expected tighter monetary policy.

 

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