Reserve Bank’s disturbing inflation forecast and the one thing set to delay ANY rate cut

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The Reserve Bank is so worried about high inflation it considered raising interest rates again this month.

The cash rate was left on hold at a 12-year high of 4.35 per cent on December 5 but it was a close call.

The minutes of that meeting, released on Tuesday, revealed the RBA board had considered raising rates by another 0.25 percentage points to 4.6 per cent.

That’s because inflation wasn’t expected to fall back to the top of its two to three per cent target until late 2025.

‘The case to raise the cash rate target by a further 25 basis points was centred on the observations that inflation was expected to remain above target for a prolonged period and that there were risks this period could be extended,’ it said.

‘Members noted that inflation was increasingly being driven by domestic demand. 

The Reserve Bank is so worried about high inflation it considered raising interest rates again this month (pictured is Governor Michele Bullock)

The Reserve Bank is so worried about high inflation it considered raising interest rates again this month (pictured is Governor Michele Bullock)

‘They also observed that underlying inflation was higher in Australia than in several other countries.’

Australia’s monthly inflation rate of 4.9 per cent in October was significantly above the equivalent US figure of 3.2 per cent, which dropped to 3.1 per cent in November.

The US Federal Reserve’s federal funds rate is also much higher at 5.25 per cent to 5.5 per cent because fewer American borrowers have variable mortgage rates.

Nonetheless, the Reserve Bank of Australia minutes said the return to target in late 2025 would see inflation fall to 3 per cent, instead of closer to 2.5 per cent as forecast earlier this year.

‘Furthermore, domestic demand was judged still to be running above the level consistent with the inflation target and growth could be supported in the year ahead by a recovery in real household disposable income as inflation declined,’ it said.

‘Members noted that the staff’s most recent forecasts, which were predicated on a lift in productivity growth, would see inflation return to the top of the target band by the end of 2025, rather than the midpoint of the band.’

The RBA minutes mentioned ‘domestic demand’ three times – three weeks after Governor Michele Bullock told a Hong Kong conference ‘very strong immigration in Australia’ also ‘meant that demand has held up’ and was ‘the reason why we’re seeing services price inflation is quite sticky in Australia’.

ANZ head of Australian economics Adam Boyton said that while the RBA had finished with its rate rises, the debut of stage three tax cuts on July 1 next year would delay rate cuts until November 2024.

‘Our views on the RBA remain unchanged, we think the cash rate has peaked at 4.35 per cent. 

‘We expect the RBA will retain a tightening bias over the first half of 2024. 

‘Rate cuts remain some distance off (we see the first easing in November 2024), with tax cuts (from 1 July 2024) and a likely additional discretionary fiscal easing to come first.’

From July 1, 2024, the number of tax brackets is being slashed from five to four for the first time since 1984.  

The minutes of the RBA's December meeting, released on Tuesday, revealed the RBA board had considered raising rates by another 0.25 percentage points to 4.6 per cent (pictured is a Woolworths shopper in Sydney's east)

The minutes of the RBA’s December meeting, released on Tuesday, revealed the RBA board had considered raising rates by another 0.25 percentage points to 4.6 per cent (pictured is a Woolworths shopper in Sydney’s east)

This will see the creation of a new 30 per cent tax bracket for Australians earning $45,000 to $200,000.

Those on $80,000 would get back $875 in 2024-25, when the tax liability for that financial year was compared with 2023-24 and 2022-23.

Higher income earners will do a lot better, with those on $120,000 getting back $1,875.

Those on $200,000 are getting back a very generous $9,075.

The Reserve Bank of Australia is holding eight monetary policy meetings in 2024, instead of 11, following a review.

This will bring Australia into line with the United States, where rate rises have been bigger when inflation was higher.

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