RBA governor Philip Lowe could drive the official cash rate beyond 4pc

There should no longer be any lingering doubt about the hawkish intentions of the Reserve Bank this year, which on Tuesday signalled it has a lot more work to do.

RBA governor Philip Lowe. Picture: Bloomberg

There should no longer be any lingering doubt about the hawkish intentions of the Reserve Bank this year after it announced a ninth consecutive rise in the ­official cash rate on Tuesday, and signalled that it has a lot more work to do.

To be sure, the tone of governor Philip Lowe’s comments on the increase of 25 basis points to 3.35 per cent suggests the central bank could well be on track to soon take the benchmark rate to a peak beyond 4 per cent before it is done.

“The board’s priority is to return inflation to target … if high ­inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,” Lowe said in a statement.

“The board is seeking to return inflation to the 2-3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”

If the official cash rate goes above 4 per cent, more economists will forecast a recession later this year, while criticism of the RBA, which was slow to start raising interest rates in response to a global surge in inflation last year, will sharply intensify.

But that is heat the RBA is anticipating and appears willing to accept if it means steering the economy away from a sustained resurgence in inflation.

Even a widely expected sharp increase in mortgage stress over coming months will not be enough to deter the RBA from raising interest rates further.

With more than 800,000 households starting to transition from ultra-low fixed interest rates negotiated during the Covid-19 pandemic, to what are now sharply higher floating-rate loans, the prospect of acute property-market pain has grown.

First-home buyers who borrowed big sums in the nation’s hyper-­expensive property market and were lured in by rapidly rising house prices and record-low interest rates are now in the firing line.

Those in the property market who haven’t taken time over the past year to adjust spending habits will probably be the first to fall.

Urging the RBA forward is fourth-quarter inflation data released last month. The numbers showed that core inflation is running well above levels that the central bank expected, while sources of inflation in the economy also increased.

Demand indicators continue to show that the economy is still running too hot, and the RBA is responding forcefully.

Before calling a halt to the raising of interest rates, the RBA will need to see concrete evidence that inflation has indeed peaked and that pressure on wages growth is starting to ebb away.

That’s going to take time and, in the interim, interest rates will be raised.

There’s a batch of quarterly wage data due out in the coming weeks, but it’s not expected to point to a fall in wages. The next quarterly inflation data is still more than two months away.

Conditions in the job market also remain tight.

The unemployment rate remains near its lowest level in half a century and job vacancies remain elevated. It’s still an environment that could fuel stronger wages growth and stoke inflation pressures.

While the RBA can be thankful for now that inflation expectations largely remain anchored, the longer soaring living costs are able to erode household budgets, the greater the risk of a surge in wages to compensate. It’s a pressure cooker it won’t ignore.

The RBA’s signalling has the intention of highlighting the fact that if inflation isn’t tackled, the pain to come will be even greater.