Inflation reached a surprise32-year high of 7.3 per cent in September,prompting some analysts to tip a half percentage point rise. The RBA now expects inflation to peak “around 8 per cent” by the end of the year. It upwardly revised its inflation forecasts for the next two years,tipping it to still be at 4.75 per cent by Christmas 2023.
Lowe said it will take a couple of years for inflation to return to the bank’s target range of 2 to 3 per cent,but the RBA was travelling along a narrow path to avoid a downturn.
“We are conscious that interest rates have been increased by a large amount in a very short period of time and that higher interest rates affect the economy with a lag,” Lowe said.
“If we are to stay on that narrow path,we need to strike the right balance between doing too much and too little.”
Treasurer Jim Chalmers said pressure on grocery prices from Victoria’s flooding and higher energy prices due to the war in Ukraine had added to inflationary pressures.
Loading
“Today’s decision has shown inflation is the number one challenge in our economy. It’s the number one focus of the government. It’s the number one focus when it comes to the budget that we handed down last week,” he said.
Chalmers acknowledged inflation would get worse before it gets better.
“Higher inflation,and higher interest rates coming with it,means that the pressure is coming on Australians from around the world,that it’s felt around the kitchen table,” he said.
Shadow treasurer Angus Taylor said this was a troubling time for many Australian households,but also small businesses.
“There’s a lot of uncertainty,a lot of concern and a lot of real pressure on their businesses. That has the risk of putting Australians out of work. And that’s exactly what we don’t want,” he said.
Experts believe the Reserve Bank will continue raising interest rates into early next year,including at the board’s next meeting at the start of December.
Russel Chesler,VanEck’s head of investments and capital markets,said given inflation will remain higher for longer,the Reserve Bank has “some way to go” on rate rises.
“While this means the RBA will be the Grinch for some this Christmas,the numbers show the vast majority of Australians are still cashed up and have ample room to spend like Santa,” he said.
Loading
Senior economist at ANZ Catherine Birch said the Reserve Bank was trying to balance two things - stronger inflation,and weaker economic growth forecasts. The RBA now expects the economy to expand by 3 per cent this year and then 1.5 per cent in both 2023 and 2024.
“There’s this balance between higher inflation in the near term,and more restrictive rates,which will likely mean growth is slower than projected,” she said.
CommSec chief economist Craig James said it was likely the Reserve Bank will continue with quarter percentage point hikes.
“Larger[0.5 percentage point] hikes from here are riskier – a sledgehammer rather than hammer,” he said.
Cut through the noise of federal politics with news,views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weeklyInside Politics newsletter here.