Australians should brace for harder economic conditions ahead, the Reserve Bank warned as it raised interest rates to an 18-year high.
While RBA staff predicted that the nation will avoid a recession, revised economic forecasts released on Tuesday projected a weaker labour market and higher-for-longer inflation.
The central bank’s latest Statement on Monetary Policy forecast inflation to remain above its two to three per cent target range until the end of 2027.
Driven by higher oil prices and the artificial intelligence investment boom, headline inflation was projected to hit 4.5 per cent by December before easing to 3.7 per cent in mid-2027.
In the RBA’s August forecasts, inflation was estimated to be 3.6 per cent by the end of the year and 2.8 per cent in June 2027.
But prices of crude oil and refined products, such as fuel, fertilisers and plastics, were 20-25 per cent higher than assumed in August, the statement said.
Minerals and agricultural commodities were also spiking due to supply chain disruptions, the Ukraine war and adverse weather conditions brought by El Nino.
Higher interest rates and declining household incomes are expected to slow economic growth.
But the RBA does not forecast gross domestic product to shrink in any quarter, avoiding the definition of a technical recession of two successive quarters of contraction.
At 1.3 per cent, the RBA’s forecast for GDP growth in 2027 is still more optimistic than economists at NAB and Commonwealth Bank, who expect economic growth to slow to one per cent.
Meanwhile, the global scramble for computer chips to power the AI boom has caused prices of consumer electronics to rise sharply.
A prime example is Apple’s new iPhone Duo, which is set to retail from an eye-watering $3500.
On top of higher cost-of-living pressures for households, the labour market is weakening faster than the RBA thought.
For the first time in a long time, the unemployment rate is forecast to have a five in front of it, climbing to 5.1 per cent by the end of 2028.
Wages are projected to grow 3.4 per cent in 2026, meaning real wages are set to go backwards one per cent, when adjusted for inflation.
Hiring intentions remained relatively healthy, but businesses told the RBA that labour costs were mounting.
Employers were casting a furtive eye to AI to cut costs.
”Many contacts have noted they are looking to drive efficiency gains from improved rostering, staff reallocations and technological improvements,” RBA staff noted in the Statement on Monetary Policy.
”Many firms are hopeful that AI-driven productivity gains will support more efficient use of existing staff resources and may influence future hiring decisions.”
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