RBA expects inflation to return to target range by end-2025
The Reserve Bank of Australia lowered its economic growth forecast and now expects inflation to return to its target range of 2%-3% by the end of 2025, suggesting that interest rates may remain high for a longer period of time.
The RBA expects headline inflation to reach 2.8% by the end of 2025, which would be the first time consumer price growth has returned to its target range, according to its quarterly monetary policy statement released on Friday. The central bank expects inflation to reach 3.1% by mid-2025, slightly higher than the 3% forecast in May. The central bank lowered its GDP growth forecast for this year to 0.9 percent from 1.2 percent.
The above forecast is based on the RBA’s benchmark interest rate peaking at 4.25% by the end of this year and falling to 3.25% by the end of 2025, which shows that the RBA is more cautious about the tightening cycle than other major central banks. The Australian central bank has raised interest rates by 4 percentage points in this round of tightening cycle, while the Fed has raised interest rates by 5.25 percentage points.
Economists from a number of institutions, including ANZ and Commonwealth Bank of Australia, now predict that the central bank’s benchmark interest rate will stay at the current level of 4.1% for an extended period.
“The Committee’s current assessment is that risks surrounding the inflation outlook are broadly balanced,” the RBA said in a statement. “But also recognize that if upside risks solidify, there is a greater likelihood that inflation will remain elevated for longer and that medium-term inflation expectations will rise.”
The RBA has warned that if inflation expectations rise, the result will be higher interest rates, a deeper economic slowdown and higher unemployment to bring inflation back to target. “