Australia central bank says inflation slowdown requires productivity revival

SYDNEY (Reuters) – Australia’s central bank on Tuesday reiterated that while inflation was slowing, it was still too high and would take time to return to target, with much depending on whether productivity revived as hoped.

Speaking at an economics conference, the head of the Reserve Bank of Australia’s (RBA) economics unit Marion Kohler said inflation was not expected to return to the 2-3% band until late 2025 and not reach the midpoint of 2.5% until 2026.

Consumer price inflation had slowed a little faster than expected to 4.1% in the December quarter, while core inflation dropped to 4.2%.

“I’d like to stress that there is substantial uncertainty around forecasts that far out,” noted Kohler.

“Our forecast reflects our expectation that subdued economic growth will balance demand and supply of goods and services in the economy and labour market conditions will ease to be around levels consistent with sustained full employment.”

The central bank held interest rates steady at a 12-year high of 4.35% last week, having last hiked by a quarter point in November. It also left the door open to another hike if necessary, though financial markets are wagering the next move will be down.

Kohler noted rising mortgage rates had combined with high inflation and historically high levels of tax payments to depress household incomes, and this was bringing demand in the economy back into better balance with supply.

This meant economic growth was likely to be subdued for the next year or two. Unemployment was seen rising from the current 3.9%, but peak at an historically low 4.4% in 2025.

The expected slowdown in inflation would require a recovery in productivity, which had been very subdued in the last few years. Kohler was optimistic productivity would improve once temporary factors related to the COVID-19 pandemic played out.

“Risks remain though and as you’d expect we will continue to monitor incoming data closely,” Kohler added.