Reserve Bank of Australia's acting assistant governor for the economy, Marion Kohler, has indicated a challenging road ahead for the country's inflation rates. Speaking at the UBS Australasia conference in Sydney on Sunday, Kohler highlighted that while goods' price growth may be easing, the service sector is still experiencing high inflation due to robust domestic demand.
The Reserve Bank, which has raised the official cash rate to a 12-year peak of 4.35% after 13 consecutive increases since May last year, now expects inflation to settle back into its target range of 2-3% only by late 2025. This extended timeline reflects the bank's struggle against persistent inflationary pressures across various sectors.
Kohler pointed out that domestically sourced inflation has been broad-based and slow to recede, with rising business costs such as energy, rent, and insurance being significant factors. Even with recent interest rate hikes, unemployment is only expected to increase slightly from 3.6% to 4.25% by the end of 2025. This comes alongside predictions of wage growth stabilization and a structural shift in the labor market leading to below-trend growth in aggregate demand. Furthermore, labour underutilization rates are anticipated to climb as tight labor conditions begin to relax and average hours worked are projected to decrease.
Adding to the inflation concerns is a cyberattack on DP World, which handles 40% of Australia's container shipments. Such disruptions could exacerbate inflationary trends by affecting supply chains.
Kohler's speech at the financial conference in Sydney's RBA building underlined the challenges facing Australia's economy. The RBA's efforts to curb inflation through rate hikes have yet to show their full impact on services price inflation, which remains stubborn due to strong levels of demand that enable businesses to pass on cost increases to customers. The central bank remains vigilant as it navigates these turbulent economic waters.
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