The cash rate is likely to rise to 2.50%, inflation will peak at about 7% and the economy will continue growing strongly.
Those were three key takeaways from an interview with Reserve Bank governor Philip Lowe.
“I think it’s reasonable that the cash rate [currently 0.85%] gets to 2.50% at some point,” he said.
Why? Due to inflation.
Right now, headline inflation (light blue line on graph) is 5.1% and underlying inflation (dark blue line), also known as trimmed-mean inflation, is 3.7%. The Reserve Bank aims to keep underlying inflation sustainably between 2-3%. But Lowe said headline inflation “will get close to 7%” by the end of the year, which would probably mean an increase in underlying inflation as well.
“That’s a very high number and we need to be able to chart a course back to 2-3% inflation,” he said.
To do so, the Reserve Bank will increase the cash rate. Lowe expects inflation to peak at the end of this year and start falling in early 2023, which will limit the amount of cash rate increases that need to occur.
That said, the economy is still in good shape, according to Lowe. “We’re expecting the Australian economy to continue to grow pretty strongly over the next six to 12 months.”
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