The Reserve Bank has given itself scope to lift interest rates even further to bring inflation under control.
Releasing its latest quarterly outlook on the economy this morning, the bank said strong population growth, ongoing demand for services, construction by the public and private sectors and the prospect of an El Nino weather pattern were all increasing the risk that inflation remained higher for longer.
This week, the bank pushed up the official cash rate by a quarter percentage point to a 12-year high of 4.35 per cent. On a $600,000 mortgage, the increase will add another $100 to monthly repayments.
Today, the bank revised upward its inflation forecasts.
The RBA wants to return inflation to its target band of 2-3 per cent by the end of 2025.Credit: Louie Douvis
It believes inflation, now at 5.4 per cent, will be at 4.5 per cent by year’s end and still at 3.5 per cent by the end of 2024.
It is not expecting inflation to be back within its 2-3 per cent target band until the very end of 2025.
“Consumer prices are rising briskly, particularly in market services and rents, and the inflationary pressures in these components are expected to take some time to dissipate. The latest readings for underlying inflation mean that there is now likely to be less progress in bringing inflation down over the next few quarters than had been thought a few months ago,” it said.
The bank said conditions in Australia “continue to echo developments in other advanced economies” where progress bringing down inflation has slowed, services price inflation remains higher and labour markets remain tight.
“The weight of recent information suggests that the risk of inflation remaining higher for longer has increased.”
The bank has been worried that inflation may continue because of a lift in wages growth.
But the RBA marginally revised down its wage growth forecasts. It expects wages to finally grow faster than inflation by the middle of next year after almost three years of real wages going backwards.