May 13th 2024.
According to the Treasury, inflation is expected to decrease and fall within the target range of 2-3 per cent by the end of this year. This forecast, which will be included in tomorrow night's federal budget, is 12 months earlier than what the Reserve Bank had predicted. If this forecast holds true, it could potentially lead to an earlier reduction in interest rates.
The consumer price index, which is a measure of inflation, is anticipated to drop back below 3 per cent by December 2024. This would be a significant decrease of more than 0.6 per cent from the current inflation rate of 3.6 per cent, and it would mark the first time since March 2020 that the CPI falls within the target range.
As we approach the federal budget, many are wondering what to expect from it. Well, based on the contrasting forecasts of the Treasury and the RBA, it seems that there may be some surprises in store for us. Finance Minister Katy Gallagher explained that the difference in their predictions is due to the policies that will be revealed in the budget. While the Treasury takes these policies into account, the RBA does not.
Gallagher further elaborated that the RBA's inflation forecasts are independent of the government, whereas the Treasury's forecasts consider all the budget decisions. Therefore, it is not surprising that there is a discrepancy between the two.
If the Treasury's forecast turns out to be accurate, it could mean an earlier-than-expected interest rate cut. Banks have previously predicted that the first cut would occur in late 2024 or early 2025, but with the possibility of a quicker decrease in CPI, these predictions may change once again.
Gallagher also assured that the budget will include measures to address inflation, although the details will not be revealed until tomorrow night. She emphasized that the government is aware that the inflation challenge is not yet over and that more work needs to be done. In fact, it has been a primary focus in their decision-making process.
Although the budget will include spending initiatives to alleviate the pressure of living costs, RBA Governor Michele Bullock stated that she does not expect it to contribute to inflation. She mentioned that the government does not want to add to inflationary pressures, and they will have to assess the budget's impact on their forecasts. However, she also noted that inflation is a top priority for the government.
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