The Reserve Bank of Australia has today been warned aggressively increasing interest rates would push inflation down but cost hundreds of thousands of jobs.
Internal modelling obtained by The Age newspaper revealed a far-larger 1 per cent hike in May would bring down inflation within its target of 2 per cent to 3 per cent earlier than forecast but it predicted the country’s jobless rate would rise to 4.5 per cent next year.
That is the equivalent to 200,000 people losing their jobs over the next 12 months.
The RBA’s Statement on Monetary Policy released earlier this month revealed Australia’s near-term inflation is likely to decline faster than previously forecast but did not rule out further interest rate rises.
“Inflation has passed its peak in Australia but remains very high,” the central bank said.
It flagged inflation could decline faster if goods inflation eases quickly due to less Aussie consumer spending.
The bank has raised official interest rates at 11 of its past 12 meetings.
Economists, major banks and financial markets forecast the central bank to maintain rates at this level until next year despite the RBA not forecasting inflation to move back within its target band until the second half of 2025.
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In this week’s budget outlook for the domestic economy was a prediction that Australia’s interest rates will remain stable at the current level of 3.85 per cent before then falling.
“Financial markets and market economists now expect the cash rate to remain at 3.85 per cent until early 2024, before gradual cuts back to 3 per cent by June 2025,” the outlook said.
In the federal budget outlook, Treasury similarly forecasts that inflation has reached its peak and will fall to the target range by 2024 to 2025.
Inflation is expected to fall from 7 per cent in the recent March quarter to 6 per cent in June and before a more drastic plunge to 2¾ per cent in June 2025. This is in line with the RBA’s inflation target of between 2 to 3 per cent.
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