RBA softens economic forecast and signals no real wage growth until 2024

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The Reserve Bank’s latest monetary policy statement revealed inflationary pains were expected to persist as households face falling real incomes through 2024.

This follows revised economic forecasts released on Friday, revealing that inflation is expected to reach 7.75% by the end of the year.

The Treasury had previously forecast inflation to hit the same number in the updated economic forecast released last week.

PRD Chief Economist Dr Diaswati Mardiamso told Savings.com.au that there was some stability in the RBA’s messaging in the Statement of Monetary Policy (SOMP), which could be a source of concern.

“On the one hand, it creates a sense of hope, certainly calms the playing field; but at the same time are we lulled into a false sense of security? said Dr. Mardiasmo.

“The biggest change can be seen in the RBA’s inflation forecast, which they have revised to peak at 8.0% in 2023, before returning to the healthy target rate of 2-3.0% in 2024.

“This recognizes the current situation, but the forecast decline (which is needed to reach 2-3.0%) is much steeper than the May SOMP, suggesting that the RBA may be preparing to raise the cash rate further. , to lower inflation.

In the August SOMP, the RBA assumes that the cash rate will reach 3% by the end of 2022.

ANZ economists said on Friday that even with the cash rate at 3% by the end of this year, inflation should at best be at the top of the RBA’s target range at the end of 2024. .

“Over time, we believe the RBA will conclude that this creates too much risk of inflation expectations rising,” the ANZ economists said.

ANZ economists previously forecast the cash rate to climb above 3% by the end of 2022.

After the release of the RBA’s August 2022 SOMP, AMP Chief Economist Shane Oliver said the RBA was still hawkish with the risk of higher inflation expectations.

This comes as the RBA noted that very considerable monetary stimulus had been put in place during the pandemic to help the Australian economy through a very difficult period.

“The strong recovery in the economy and high inflation necessitate the withdrawal of monetary stimulus earlier and faster than expected,” the RBA said.

“The increases were necessary to create a more sustainable balance between demand and supply in the Australian economy.”

The RBA continued to echo its sentiment that the Board is committed to doing what is necessary to ensure that inflation returns to the target range over time.

“It seeks to do so in a way that keeps the economy in balance,” the RBA said.

“The path to achieving this balance is narrow and subject to considerable uncertainty. The Council expects to take further steps in the process of normalizing monetary conditions in the coming months.

In short, this means further interest rate hikes.

Real wages will reach levels not seen since 2009

The reality of falling real wages does not appear to deter the RBA, with the central bank noting that more than 60% of companies so far plan to raise wages by more than 3% over the coming year.

In its August SOMP, the RBA noted that broader measures of labor income growth are expected to rise at a faster rate than the wage price index over the forecast period.

“These broader measures imply less of a decline in real earnings than the narrower wage price index measure suggests,” the RBA said.

The RBA’s own forecast, however, shows a 3.1% drop in real wages over the next 12 months.

Real wage forecast.JPG

Source: RBA Monetary Policy Statement, August 2022.

If these predictions turn out to be correct, real wage growth would not have been this weak since 2009.

The RBA had previously forecast in its SOMP for the May quarter of 2022 that real household income would grow by 0.9% in the last three months of the year.

Turning 180 degrees, the RBA now estimates that real household income will register a fall of 0.9%.

ACTU President Michele O’Neil said June 2024 for real wage growth is too long to wait.

“Wages have stagnated at 2.6% growth while inflation is expected to reach 7.75% by the end of the year,” Ms O’Neil said.

“The cost of living crisis, and now the rapid and sharp rise in interest rates, is forcing many workers to dip into their savings. They just can’t bear to see their wages continue to decline in real terms.”

The RBA has warned that a decline in real incomes for the average household could weigh on spending more than expected, particularly if household wealth also declines.

“Many households should be well placed to absorb higher prices and interest charges without drastically reducing their consumption,” the RBA said.

“However, some households will be more budget constrained in the period ahead, particularly those with low savings reserves and high debt.

“Rising prices, especially for food and fuel, are likely to have a particular impact on low-income households (who tend to spend a greater share of their income on these necessary items).”


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