By Shane Wright and Rachel Clun
The Reserve Bank on Tuesday kept interest rates on hold at 4.35 per cent and released its latest quarterly outlook for the economy.
In a collective statement after the board’s first-ever two-day meeting, it warned it is prepared to keep raising interest rates to combat high inflation.
But in its statement on monetary policy accompanying the rates decision, the bank also released forecasts for the economy that assume rates will be lower by the year’s end.
Here are five key takeaways about its outlook for the economy:
1. The bank is still worried about inflation pressures across the economy, arguing consumers – even though many are struggling – are continuing to spend up big, particularly in areas stretching from eating out to insurance.
“Our overall assessment is that aggregate demand remains above the economy’s capacity to supply goods and services, thereby putting pressure on inflation,” the statement on monetary policy says.
2. The economy is going to slow rather abruptly over the next few months as the combination of high interest rates, the cost-of-living and high personal taxes bite.
“Many households have had to make difficult adjustments in response to the challenging conditions, particularly households with lower financial buffers,” it says.
3. People are adapting to high inflation by changing their shopping patterns, looking for bargains or replacing a trip to Los Angeles with one to Port Macquarie.
“Over recent months, retailers continued to report lower sales volumes than a year earlier, despite extensive promotions during the Black Friday, Christmas and Boxing Day sales. Contacts note that consumers are concentrating their spending during these and other promotional periods as they search for bargains.”
4. Don’t expect the surge in rents to end any time soon.
“The rental market remains tight and the ongoing weakness in dwelling investment suggests this is unlikely to ease in the near term,” the bank says.
5. Even the RBA believes it will be cutting interest rates this year. All of its forecasts are predicated on the assumption that by year’s end, the cash rate will be lower at around 3.9 per cent. Governor Michele Bullock was at pains to make clear that it is only a working assumption.
“The point I’d make about the forecast is that there is a cash rate assumption in the forecasts and there has to be. We need some sort of assumption to work with there. But I emphasise the word “assumption”. It isn’t a commitment, a forecast, or even an expectation. It’s something to work with,” she said.
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