More rate rises ‘may still be required’: RBA

Mortgage holders should be prepared for more pain, after Reserve Bank board minutes reveal ‘further increases in interest rates may still be required’ to bring down inflation.

The RBA minutes showed the central bank believed there was “little room” for inflation to prove stickier than expected while meeting its inflation target. Picture NCA NewsWire / Gaye Gerard

Mortgage holders should be prepared for more pain in coming months, after new Reserve Bank board minutes revealed “further increases in interest rates may still be required” in order to bring inflation back under control.

The RBA on May 2 surprised investors and most economists by lifting its cash rate target from 3.6 per cent to 3.85 per cent.

The minutes from that board meeting showed members debated the cases for a pause versus a hike, including “multiple arguments” in favour of an 11th increase in 13 months.

The central bank forecasts consumer price growth to drop to the top of the 2-3 per cent target range only by mid-2025, from 7 per cent now.

Members said this prediction “left little room for upside surprises to inflation, given that inflation would have been above the target for around four years by that time”.

While the board “noted that inflation had peaked and was showing signs of slowing further”, they discussed the potential for inflation to not come down as quickly as expected, and this eventually was considered the greater risk than inflation proving lower than anticipated.

The Reserve Bank’s latest board minutes reveal ‘further increases in interest rates may still be required’ to curb inflation. Picture: Gaye Gerard/NCA NewsWire

While goods inflation had eased, services inflation could follow the overseas lead and prove more persistent, the minutes noted.

What’s more, “strong population growth and low rental vacancy rates could also see rents grow even faster than the central forecast envisaged”.

“Another upside risk to inflation was the possibility that productivity growth remains very weak,” the minutes noted.

“Members observed that the forecast for inflation to return to the top of the target band by mid-2025 was predicated on productivity growth returning to around the modest pace recorded prior to the pandemic.

“If this did not occur, growth in unit labour costs would be uncomfortably fast.”

There was also the risk of inflation becoming more entrenched in the country’s psychology, which would make it harder to shift later and require sharply higher rates.

A depreciating Aussie dollar – which tends to boost imported inflation – and the recent turn in the property market also argued in favour of another rate hike, the minutes showed.

“In reaching their decision, members acknowledged that there were still significant uncertainties surrounding the economic outlook, particularly for household consumption.

“But, on balance, given the board’s strong commitment to price stability and the importance of ensuring that inflation expectations remain anchored, members judged that a further increase in interest rates was warranted.”

The minutes reiterated the board’s “determination to do what is required to bring inflation back to target, while emphasising that it is still seeking to traverse the narrow path”.

“Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve,” the minutes said.

NAB this week predicted a further rate rise to 4.1 per cent in July or August, with the potential for a further hike to 4.35 per cent this year.