RBA Deputy Governor Guy Debelle said in a speech the increase in labor supply in Australia has meant that “the strong employment outcomes in recent years has not generated the pick-up in wages growth that might otherwise have occurred”. He expected “wages growth to remain largely unchanged at its current level over the next couple of years.”

He noted that “dynamics of participation and unemployment flows will have an important bearing on wages growth as well as household income growth”. Also, “the more wages growth is entrenched in the 2’s [2-3 per cent range], the more likely it is that a sustained period of labour market tightness will be necessary to move away from that.”

RBA has so far failed to push unemployment down to the 4.5% level, which should generate sustainable wages growth and inflation. Markets are expecting more policy easing from the central bank next year, including possibility of QE.

Debelle’s full speech here.

In the Statement on Monetary Policy, RBA reiterated that “further increases in interest rates will be needed to ensure that the current period of high inflation is only temporary.”

“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”

The economy is not forecast to contract within the projection horizon. Meanwhile, trimmed mean inflation is projected to stay higher and longer till mid 2024.

Year-average GDP growth forecast to be (from 3.75% in 2022):

• 2.25% in 2023 (unchanged from prior forecast).
• 1.50% in 2024 (unchanged).
• 1.75% in 2024/25 year (new).

Headline CPI (7.8% in December 2022) is projected to slow to:

• 6.75% in June 2023 (unchanged).
• 4.75% in December 2023 (unchanged).
• 3.50% in June 2024 (down from 4.25%).
• 3.25% in December 2024 (unchanged).
• 3.00% in June 2025 (new).

Trimmed mean CPI (6.9% in December 22) is projected to slow to:

• 6.25% in June 2023 (up from 5.50%).
• 4.25% in December 2024 (up from 3.75%).
• 3.25% in June 2024 (down from 3.50%).
• 3.00% in December 2024 (down from 3.25%).
• 3.00% in June 2025 (new).

Full SoMP here.

RBA raised cash rate target by 50bps to 1.35% as widely expected.  It also increased the interest rate on Exchange Settlement balances by 50bps to 1.25%.

It also maintains tightening bias. “The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” it said. The timing and size of future hikes will be guided by the incoming data and assessment of the outlook for inflation and the labor market.

RBA also pointed to “behaviour of household spending” as one source of domestic “ongoing uncertainty”. Global outlook “remains clouded” by war in Ukraine and the impacts of energy and agriculture prices. There are also ongoing uncertainties related to COVID, especially in China.

Full statement here.