Plenty of sting in RBA tale

Hopes that it may only take a moderate lift in interest rates to calm inflation have been dealt a blow by the Reserve Bank of Australia.

While the RBA Board’s decision at its May 3 meeting to raise the cash rate by 0.25 of a percentage point had been widely anticipated, much more interesting – and worrying, if you happen to be a borrower – is what RBA Governor Philip Lowe and the RBA think is in store for the country over the next couple of years.

Like a pulp fiction mystery author, Dr Lowe left it until two-thirds of the way through his monetary policy statement to make remarks that will make mortgage holders across the country nervous.

After offering some reassuring words about an expected eventual easing in inflation to within the central bank’s 2 to 3 per cent target band, the RBA Governor then slipped in the metaphorical sucker punch.

He warned that the RBA expects headline inflation – currently at 5.1 per cent – to hit 6 per cent this year (and underlying inflation 4.75 per cent) and not moderate to around 3 per cent until mid-2024. That is two whole years away.

The real kicker came in the Governor’s next sentence: “These forecasts are based on an assumption of further increases in interest rates”.

So, barring a highly unlikely plunge in inflation in the near-term, several more interest rates rises are on the way.

While no-one, including the RBA, knows how high they will need to go, the RBA’s worrying language surely opens the way for the cash rate to hit 2.5 per cent or more.

The particular twist in this tale is that the RBA is detecting signs of a long-awaited acceleration in wages.

While this will be good news for millions of wage earners who for the past decade have had to get by on stagnent salaries, it suggests that the domestic demand pressures contributing to inflation are unlikely to ease any time soon.

A lot will be riding, instead, on improving global energy and food supplies and unglogging supply chains and clearing shipping backlogs.

For that, we all better hope that Ukraine war does not spread and that our vaccines can handle future COVID-19 mutations.

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