Australian Economy

Will the RBA lift interest rates to tackle inflation?

“… members noted that most Australian households remained able to service their debts and meet essential expenses, and this was expected to remain true even if inflation were to prove more persistent than anticipated,” the board statement said.

But that’s the big picture view of household budgets, and some are doing worse than others.

“Some households were finding it difficult to service their debts and meet essential expenses,” the statement said.

So far, the rate of households falling behind on repayments has remained low and, while the bank is keeping an eye on it, is not a major concern.

Will inflation stay higher for longer?

The central bank board said it received no data before its March meeting that had changed its outlook on inflation, which it expects will return to the top of its 2-3 per cent target range by the second half of next year.

Because inflation has continued to track down and households remain fairly resilient, the board decided to keep interest rates steady.

However, it said there were risks to that inflation forecast, and one of those risks is that inflation falls more slowly than anticipated.

Of particular concern is services inflation, which includes insurance, energy bills, healthcare and education. Insurance prices have continued to rise rapidly – the latest monthly inflation figures show insurance inflation rose by 16.5 per cent in the year to February.

Other factors that could keep inflation higher for longer include sluggish productivity growth and demand outstripping supply for longer than expected.


Will household spending increase as wages rise?

To that demand-and-supply issue, the Reserve Bank said there was another risk – that household spending does not pick up as anticipated.

Household spending has been sluggish due to cost-of-living pressures and because real disposable incomes have been going backwards.

While wages growth has picked up, and in February overtook inflation growth for the first time in nearly three years, the central bank is worried households won’t respond to having a bit more cash by spending it as expected.

“If that occurred, growth in output would be slower than expected and inflation would be likely to decline more quickly,” the board said.

The Reserve Bank board thinks the probability of this risk and of inflation staying higher for longer is fairly evenly balanced at this stage.

Is the job market slowing down?

The Reserve Bank needs the job market to slow further to ensure it can get inflation down to a more normal level and keep it there.

But the central bank also wants to keep as many people in jobs as possible, so it is monitoring all labour market changes closely.

In January, the unemployment rate rose to 4.1 per cent, but the board said that overall, “labour market conditions nevertheless remained a little tighter than was consistent with sustained full employment and inflation at target.”

Since its March meeting, labour market figures showed the unemployment rate actually fell in February, down to 3.7 per cent, but importantly in trend terms it remained the same.

What elsewhere in the world is affecting Australia’s economy?

Other countries’ economies can be a gauge of how Australia’s economy will perform in coming months. The health of other economies can also affect Australia’s, and the Reserve Bank is keeping an eye on overseas developments.


It singled out the fact that inflation rose modestly in some countries, including the United States, and inflation remained uneven between goods and services.

China’s economy has been closely monitored, particularly as its housing market remains in deep trouble.

China is Australia’s largest bilateral trading partner, and the RBA board noted concerns about forecasts for steel demand which were weighing on iron ore prices and reducing exporter incomes.

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