The Reserve Bank Board raised the cash rate by 25 basis points to 2.85% at its November meeting. The 0.25 percentage point lift is the sixth-rate hike in a row and brings the cash rate to 2.6 per cent.
The 2023 forecast increase is particularly troubling – a central bank which has a 2-3% inflation target and accepts that 4.75% inflation in the following policy year runs the risk of embedding inflationary psychology for both businesses and employees making it more difficult to avoid an even more extended period of high inflation.
Forecast growth rates have been lowered to 1.5% (from 1.8%) in 2023 and 1.5% (from 1.7%) in 2024
Risks of embedding inflation psychology in the system - “The Board will continue to pay close attention to the evolution of labour costs and the price-setting behaviour of firms.”
The forecast for the unemployment rate by year’s end is 3.5% (up from 3.4% in September) constrained by labour supply rather than demand, highlighting a risk to wage growth.
The Board decided to stick with the 25-basis point path despite a significant lift in the inflation forecast for 2023 from 4.3% to 4.75%. It now seems that the Board is prepared to await the impact of the series of hikes at the risk of embedding inflation psychology in the system which would eventually require a much more damaging policy response.
Source: Westpac
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