A global upswing driven by the manufacturing and industrial sectors will provide a tailwind for Australia’s economy, according to the Reserve Bank of Australia’s quarterly statement on monetary policy, but underlying inflation is expected to remain low until at least mid 2020.
The RBA, which has inflation target range between 2 per cent and 3 per cent, forecast underlying inflation would be about 2.25 per cent by mid-2020.
Inflation would be likely to increase gradually over time, with strong competition in the retail sector one example of downward pressure on price growth.
Underlying inflation was below 2 per cent in 2017, the central bank said.
Globally, however there had been volatility in equity markets in recent days as analysts reassessed the outlook for inflation and how quickly monetary policy will tighten.
“Sovereign bond yields have risen, though credit spreads remain narrow and financial conditions expansionary,” the bank said.
“The run-up in equity prices at the beginning of the year has largely been reversed, but equity prices generally remain significantly higher than a year ago.”
Locally, wages were expected to grow steadily.
“The labour market has been particularly strong,” the bank said.
“GDP growth picked up to 2.75 per cent over the year to the September quarter.
“The December quarter was affected by temporary declines in some categories of exports.
“Beyond that, however, GDP growth is expected to increase over the period ahead, to be a little above 3 per cent over both 2018 and 2019.
“Wage growth remains subdued and is forecast to increase gradually.
“Despite the recent and forecast improvements in labour market conditions, the unemployment rate is likely to remain above estimates of full employment in Australia for some time.
“Wage growth has also been slow to pick up in some other advanced economies where labour markets are already tighter, suggesting that some structural factors could also be holding wage growth down.”
Two other factors would impact wage growth, the bank said.
One was lower wage growth outcomes from enterprise bargaining agreements, while the counteracting that was reports of labour shortages in some industries.
