RBA is approaching rising interest rates


The Reserve Bank of Australia (RBA) sees faster economic growth, lower unemployment and inflation pushing back to the midpoint of its target in the coming years.

In other words, it is approaching raising interest rates for the first time since the end of 2010.

These are the bank's latest forecasts from its quarterly monetary policy statement (SoMP) released today, including those offered three months ago.

With Australian economic growth booming in the first half of the year, its projected GDP growth profile was increased with the bank now expecting the economy to grow 3.5% in the year through December, faster than the 3.25% who saw it in August.

In addition, the economy is seen growing at a pace of 3.25% at the end of the year through mid-2020, before slowing to 3% at the end of its forecast range.

Although similar to the one presented in August, the RBA now expects growth to be slightly faster and longer in the coming years.

Crucially, the entire GDP growth profile is above the "trend" level of 2.75%, where inflation and unemployment levels should remain stable.

Faced with this, it also sees unemployment falling a bit more and inflation rising a little faster than three months ago.

He sees the level of unemployment at the current level by the end of next year, before falling to 4.75% by mid 2020, as faster economic growth helps absorb excess capacity in the labor market.

Previously, there was no 5% unemployment rate across the forecast horizon.

With stronger economic growth helping to reduce unemployment and, in all likelihood, wage pressures, the RBA also sees underlying inflation rising a little faster than before.

After growing only 1.75% in the year through September, it sees underlying inflation reaching the bottom of its target of 2-3% by the middle of next year, before rising to 2.25% by the end of 2019 , a level at which it is then expected to remain.

It is important to note that he still does not see the underlying inflation reaching the midpoint of his target, a result that is likely to prevent a short-term rate increase if his predictions are correct.

It also suggests that when rate increases potentially arrive, they will likely be small and alternating by nature, based on the RBA forecast profile.

However, combined with faster growth and lower unemployment, it suggests that the RBA is approaching, rather than evading, to start tightening the policy.

More to follow …

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