As Australia’s cost of living nightmare worsens by the day, one of the country’s top bosses has warned of the reality of what is to come.
Federal Treasurer Jim Chalmers has warned inflation is Australia’s “defining challenge” after Reserve Bank Governor Philip Lowe predicted it would hit 7% this year.
In a speech to the American Chamber of Commerce in Australia on Tuesday morning, the RBA boss said the board expected inflation to peak at 6% in 2022, but forecasts had been pushed further highest since early May when gasoline prices started. to skyrocket.
Today, the RBA is bracing for a spike of 7% in the December quarter, up from the current rate of 5.1%.
And although he said he expected it to fall early next year, it would be “a few years” before inflation returned to normal.
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“It will take a few years, I think, before inflation gets back into the 2-3% range. Over the next two years, this will gradually decrease,” he said.
“That’s why it’s important that we chart that course there and that people trust that we will.”
He said inflation should start to subside in the coming months due to three major factors – a reduction in supply chain disruptions caused by the pandemic, tighter monetary policy and because some prices high are likely to fall.
Speaking afterwards, Mr Chalmers thanked Dr Lowe for his “candor and candor”.
“Inflation is expected to get worse before it gets better and interest rates are expected to rise as well,” Chalmers said.
“It is already making life very difficult for Australians and Australian industry, as the prices of goods, services and supplies are soaring.
“We have a lot to do for us in this country and in our economy, but we cannot just claim to eliminate these great challenges that we face over the next six or twelve months in particular.
“It is possible to be optimistic about the future of our economy and the future of our country, while recognizing that we have to navigate together in a really delicate, really difficult combination of circumstances.
“What is needed here is patience, perseverance, a lot of collaboration and working together.”
Dr Lowe added inflation was increasingly coming from within Australia rather than global factors, but pledged to do ‘what is necessary’ to stop it rising too far.
“After the strong recovery from the pandemic, growth in domestic spending is now testing the ability of the economy to meet demand for goods and services,” Dr Lowe said.
“This is particularly evident in the labor market, with many companies reporting that labor availability is a significant constraint on their ability to operate and/or grow.
“High inflation hurts the economy, reduces the purchasing power of people’s incomes and devalues people’s savings. It’s also regressive, hurting most of those least equipped to protect themselves.
Mr Chalmers echoed the RBA’s prediction of a recession, saying: ‘We are not working on the expectation at this point that this risk will happen or happen.
“We have reason to be cautiously optimistic about the future of our economy, but first we must overcome these challenges ahead.”
Prepare for more interest rate issues
Dr Lowe also confirmed that further interest rate hikes were a certainty.
“As we return to 2-3% inflation, Australians should prepare for further interest rate hikes,” he said.
“We have decided to make a larger adjustment of 50 basis points based on additional information suggesting a further upward revision to an already elevated inflation forecast.
“The board also took into account the fact that the level of interest rates was still very low.
“I would like to emphasize however that we are not on a predefined path. The speed at which we raise interest rates and how far we need to go will be guided by incoming data and the board’s assessment of the outlook for inflation and the labor market.
However, he said he did not believe a recession was on the horizon for Australia given that “the fundamentals are still quite positive”.
The RBA’s ‘reputational damage’
Dr Lowe also admitted the RBA suffered a ‘reputational damage’ when it tried to reverse its Covid-19 stimulus package.
During his speech, he admitted that a review of the RBA’s policy of setting interest rates at 0.1% over three years during the pandemic caused a “messy” end to the program at the end. of 2021, which had “caused reputational damage to the bank”.
Meanwhile, Australians are nervously awaiting the RBA’s next interest rate decision on July 5, when the board is expected to vote on another “oversized” 50 basis point rate hike, which would bring the official exchange rate at 1.35%. .
It comes after a 25 basis point rise in May and a 50 basis point jump earlier this month, with the spot rate now at 0.85%.
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