Reserve bank flags more rate rises in its latest update

Australians struggling with the cost of living in the wake of the RBA’s 11th rate hike have been given a grim warning.

Inflation will decline faster than expected as the economy strains under the weight of rapid rate rises, the cost of living, and soaring rents, according to the Reserve Bank of Australia.

The national bank’s latest economic update, released just days out from the federal budget, confirmed inflation had peaked, but warned the era of interest rate increases isn’t over.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve,” read the RBA’s statement of monetary policy.

On Tuesday the central bank board shocked markets and homeowners with an unexpected increase in the cash rate by 25 basis points to 3.85 per cent.

The Reserve Bank released a fresh set of forecasts on Friday. Picture: NCA NewsWire / Nikki Short

The Commonwealth Bank was the last of the big four banks to pass on the rate hike to mortgage holders on Friday morning.

Rate City’s Sally Tindall said May’s rate hike could be the one that “sinks some families’ budgets into the red”.

While the RBA update acknowledged the “painful squeeze” the fast pace of rate increases has had on households, it reiterated its “resolute determination” to trim inflation.

The bank forecasts the consumer price index to fall to 6.3 per cent in June and drop to 4.5 per cent by December, before returning to the top of its 2 to 3 per cent target range by mid-2025.

“The longer inflation remains above target, the greater the risk that inflation expectations rise and price-and wage-setting behaviour might adjust accordingly,” it said.

“If this were to eventuate, the end result would be even higher interest rates and a larger rise in unemployment would be required to bring inflation back to target.”

Rent, one of the main drivers of inflation, is only expected to pick up over the next year, warned the RBA.

Rising rents is significant driver of inflation. Picture: NCA NewsWire / Nicholas Eagar

“A shortfall in housing supply, relative to strong demand from a rising population, is expected to result in continued upward pressure on rents,” the statement said.

Governor Philip Lowe previously said the fall of the average number of people living in each household that occurred during the pandemic also had a role in the rental crisis.

But the update noted that due to the sharp increase in rent prices and supply, more people were looking to get a housemate.

Australia’s near term-economic forecasts were also slashed, with economic growth (1.7 per cent) expected to be half a percentage point lower than forecast three months ago.

It doesn’t improve over the year either — forecast down from 1.6 per cent to 1.2 per cent in the year to December.

The bank expects the unemployment rate to uptick slightly in June to 3.6 per cent before reaching 4 per cent by year’s end.

Originally published as Reserve bank flags more rate rises in its latest update