Aussies warned to brace for two more years of pain
Updated . First published at
Australians could have another two years of cost-of-living pain ahead of them, as the Reserve Bank of Australia (RBA) forecasts a long battle to rein in inflation.
The minutes from the RBA’s interest rates meeting in June, in which the board decided to hold the cash rate steady at 4.35 per cent, revealed the extent of its concern.
Reserve Bank of Australia Governor Michele Bullock handed down the latest interest rate decision in June. Louise Kennerley
The board noted it could take another two years to bring inflation back into the 2-3 per cent target range.
“Inflation remained materially above the board’s target, and members noted that the staff’s May forecasts… envisaged that it would be a further two years before inflation returned sustainably to target,” the minutes, released on Tuesday, read.
“Against that backdrop, members agreed that monetary policy needed to remain restrictive to unwind current excess demand through a period of below-trend growth.”
The board also noted core inflation, which strips out the most volatile price movements, will likely increase due to fuel supply disruptions.
Excluding a period of within-range inflation from August 2024 to August 2025 – during which Prime Minister Anthony Albanese declared “the worst is behind us” – Australia has recorded above-target levels since September 2021.
The latest figures released last week showed it unexpectedly slowed to 4 per cent in the 12 months to May, down from 4.2 per cent in April.
It was the lowest figure since the war in the Middle East began in February and the second consecutive month of slowing inflation.
Despite being a welcome sign, the trimmed mean – the RBA’s preferred measure of core inflation – rose to 3.6 per cent in the 12 months to May, up from 3.4 per cent in April.
The board noted that underlying inflation will likely continue to rise due to fuel supply disruptions caused by the war in the Middle East.
The US and Iran have issued conflicting statements about renewed talks after their fragile interim deal was marred by continued fighting and threats.
The board believes it could take “considerable time” to restore oil supply to pre-conflict levels and high oil prices could feed into price and wage decisions.
“These considerations led members to assess that the Middle East conflict still posed material upside risks for inflation and downside risks for growth,” the minutes read.
Treasurer Jim Chalmers has previously said the economy is being held “hostage” by the conflict abroad.
Domestic measures like weak productivity growth and supply were also factors the board noted could hinder progress to reduce inflation.
The board concluded its meeting by promising to raise interest rates again if inflation remains persistent.
“The board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome, including increasing the cash rate target if necessary,” the minutes read.
Australians could face two more years of pain. Getty Images
Commonwealth Bank, NAB and ANZ expect the interest rate to remain unchanged for the rest of the year, while Westpac forecasts two further hikes in August and September.
Come next year, all the big four banks are expecting at least two rate cuts.
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