The Reserve Bank of Australia on Friday raised its forecasts for core inflation and wage growth and warned of further interest rate hikes, raising the risk of a recession.
In a strongly worded quarterly statement on monetary policy, the central bank said domestic cost pressures were rising even as headline consumer price inflation likely peaked last quarter.
The statement showed that the RBA forecast average inflation forecast for the fiscal year ending June at 6.25%, higher than the previous forecast of 5.5%. The central bank also expects this value to drop to 4.25% in December.
The central bank expects wage growth to climb above 4 percent in June and peak at 4.25 percent later this year.
“The board anticipates that further interest rate increases will be needed to ensure that the current high inflation is only temporary,” the central bank said. The central bank emphasized that in order to avoid a price-wage spiral, the committee will continue to pay close attention to the pricing behavior of enterprises and the evolution of labor costs in the coming period.
The Reserve Bank of Australia raised interest rates for the ninth time in a row on Tuesday, raising the cash rate to a new ten-year high of 3.35%. This round of rate hike cycle has raised interest rates by a total of 325 basis points.
George Tharenou, chief economist at UBS, said the hawkish attitude expressed by the RBA showed a surprisingly hawkish inflation outlook, which means that there may be two or more interest rate hikes in the future.
Tharenou now expects the eventual rate to peak at 3.85%, up from 3.35% previously, and he said the risk of a recession in the second half of the year has increased sharply to around 25%.
