The Reserve Bank's Inflation Forecast and the Upcoming Budget
The Reserve Bank of Australia has revised its inflation forecasts, predicting that interest rates will remain high for the rest of 2023 and decline only slowly thereafter. This change is attributed to the ongoing challenge of inflation, which is proving more difficult to control than previously anticipated.
The updated forecasts show inflation rising to 3.8% in June and remaining at that level for the rest of the year before falling back in line with the February forecast. Inflation is expected to remain above the bank's target band of 2-3% until late 2025 and not return to the center of the band until mid-2026.
This situation mirrors the United States, where the expected date of rate cuts has also been pushed back. The US Federal Reserve Chair, Jerome Powell, has stated that he will not cut rates until he is confident that inflation is heading back towards the target.
In light of these developments, the Australian government is facing a difficult task in preparing for next week's federal budget. Treasurer Jim Chalmers is expected to focus on measures that will give the Reserve Bank more confidence that inflation is heading down. However, he is unlikely to implement significant spending cuts due to concerns about pushing the economy into recession.
The latest data from the Bureau of Statistics shows that Australians are buying and dining out less, despite a population increase of over 2%. This indicates a per capita recession, where the amount spent and earned per person has shrunk.
The ANUPoll also reveals increased financial stress among Australians, with more people borrowing money from friends and relatives, falling behind on bills, and cutting back on spending.
Given the current economic climate, the government is likely to prioritize maintaining spending levels rather than implementing significant cuts. This approach aims to avoid pushing the economy into a full-blown recession.
The Reserve Bank acknowledges the economic weakness and has downgraded its growth forecasts. It also recognizes that the full impact of its interest rate rises is yet to be felt.
Therefore, the upcoming budget is expected to focus on maintaining spending levels and providing support to Australians facing financial stress, while acknowledging the need to address inflation over the longer term.