Reserve Bank warns Australians of higher interest rates against rising inflation

The Reserve Bank of Australia has warned the nation is headed for its highest inflation rate in 32 years against an economy which has been more resilient than expected following the worst of the global pandemic.

RBA Governor Philip Lowe has predicted a spate of higher interest rates in the coming months amid global supply chain pressures due in part to the war in Ukraine and COVID-19 lockdowns in China.

He said inflation would likely move from the current 5.1% to 7% by year end.

The last time inflation rose more than 7% was in 1990, as the country was entering a recession and the RBA responded by beginning to pare back the extremely high cash rate from 17%.

In a rare television interview this week, Dr Lowe said the bank would do whatever it could to bring inflation back to the targeted range of around 3%.

“By the end of the year, I expect inflation to get to 7% … that is a very high number and we need to be able to chart a course back to 2% to 3%,” he said.

“I am confident we can do that but it is going to take time.”

Cash rate rise

Home buyers are being warned the cash rate could surge to 2.5% for the first time in eight years, which would see repayments on a $600,000 mortgage increase by $725 per month.

The official cash rate currently stands at 0.85% after the bank raised it at two monthly consecutive board meetings from a record low 0.1%.

Last year, the bank had been expecting to keep the cash rate low until 2024, but Dr Lowe said the current strength of the Australian economy meant it no longer needed emergency interest rate settings.

“The economy did not evolve as we expected,” he said.

“It has been much more resilient and inflation has been higher we thought we needed to respond to that.”

He said the economy was in “remarkable shape” with unemployment at a 50-year low of 3.9%; households nationwide building up financial buffers of around $250 billion; and a reduction in the number of homeowners falling behind on their mortgage repayments.

Economic growth

Dr Lowe is confident the Australian economy will continue to grow strongly over the next six to 12 months, with households being able to call on their savings if needed.

“Even if income growth is a bit weaker, people have the financial capacity to keep spending,” he said.

“There is a big backlog of construction work to be undertaken and the number of job vacancies is extraordinarily high.”

US recession

Dr Lowe’s comments came as global share markets fear the US economy could fall into recession if the Federal Reserve hikes interest rates to combat its own inflation problem.

A decision is expected this week, with pundits saying the bank will increase rates to higher than 50 basis points.

US inflation currently sits at 8.6%, which is its highest level in 41 years.