Higher mortgage costs and rising fuel, food and services prices are set to become the norm for Australian households, with the Reserve Bank cautioning the economic fallout from the Iran War will linger long after it ends.
It comes after the Reserve Bank delivered a third consecutive rate hike on Tuesday in an 8-1 monetary policy board member decision, as it continues to grapple with rising inflation.
There was little comfort for households to find in comments from governor Michele Bullock following the announcement, with the policy magnate warning an imminent end to war in the Middle East will not solve Australia’s domestic inflation problems.
The third meeting of the RBA monetary policy board on Tuesday marked a turning point for Australian households, who had been waiting for a clearer picture as to how much of a threat the bank views the conflict in the Middle East.
The bank’s latest statement on monetary policy shows it has further downgraded its medium-term growth outlook to an all-time low of 1.4%. Employment growth is expected to slow slightly into next year, while much-needed productivity expectations have been lowered.
“The interest rate rise was all but inevitable,” Deloitte Access Economics partner Stephen Smith said. “There is now a credible risk that rates could rise to levels not seen for around 15 years.”
The RBA brass have been cautious over the last two months to avoid labelling the Iran War as a long-term tinderbox for high inflation in Australia, instead opting to highlight the capacity issues in the economy before February.
Headline inflation jumped from 3.4% in the 12 months to November to 3.8% by December, before hitting a near three year high of 4.6% in March.
The bank’s statement also confirms it is not viewing the Iran War as a blip in Australia’s economic radar, but the catalyst for what will be a lengthy and trying period for households.
“Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly,” the statement read. “Inflation is likely to remain above target for some time.”
Reserve Bank of Australia governor Michele Bullock has handed down another cash rate rise. Picture: David Gray
Expectations for the trimmed mean inflation figure, which strips out the most volatile prices in the economy to provide a more accurate underlying picture, were raised by the bank after its hike decision.
Critically, the forecasts are built around current oil market pricing and use the base position that the conflict in the Middle East will end relatively soon.
Using that estimation, the RBA is expecting the trimmed mean to come in at 3.5% in the final quarter of the year, up from its last estimation of 3.2%. It is now still expecting the trimmed mean will be outside of it's 2-3% target range in Q2 2027, with forecasts for a 2.8% reading now increased to 3.1%.
These latest forecasts show underlying inflation coming back into the RBA’s target late next year and down to 2.5% by the end of the forecast horizon in Q2 2028.
Spending watch
With spending weighing heavily on the path inflation will take, the RBA used Tuesday’s rate rise to issue a firm warning to the government ahead of the upcoming federal budget.
Ms Bullock said fixing the demand and supply issues in the economy relies on both the government and households spending less in the coming months.
“The ability of the economy to supply the goods and services being demanded including by the government and the private sector – was outstripping the ability of the economy to supply it,” she said in a media conference following the decision.
“When inflation is already too high and the economy is facing capacity pressures, it doesn’t take much additional spending to make the job of returning inflation to target more challenging.”
The RBA wants public and private spending to cool: Picture: Hu Jingchen/Xinhua
Treasurer Jim Chalmers pushed back on Wednesday, stating the budget will “take the inflation challenge seriously”.
“We know people are under pressure,” he said to Channel 7. “The governor was asked about a hypothetical scenario…that hypothetical doesn't reflect the reality of the budget, which is all about winding back spending where we can responsibly do that.
“Budgets aren't the primary driver of prices in our economy – interest rates didn't go up yesterday because of government spending.”
Treasurer of Australia Jim Chalmers said there is no link between the May rate hike and government spending. Picture: Hilary Wardhaugh
Next week’s budget will be critical to for the government to prove a “genuine commitment” to sensible spending, Deloitte Access Economics' Mr Smith said.
“Without reforms that lift productivity and expand supply-side capacity, an economy that was already operating near capacity before the Middle East conflict is likely to remain constrained,” he added.
“In that environment, inflationary pressures will be more difficult to contain.”
Mortgage pressures mount
With electricity costs making winter a high-spend season already, the rate hike is set to hit borrowers directly in the pocket before May is out.
The big four banks are passing on this week's rate hike to home loan customers. Picture: Supplied
Australia’s largest lenders –National Australia Bank (NAB), Westpac, Commonwealth Bank (CBA) and ANZ – have all confirmed Tuesday’s rate rise will be passed on to customers.
Changes will flow through for variable home loan holders at all four big banks on 15 May.
Westpac will lead the big four as the most affordable lender once new rates take effect, with its lowest variable rate to sit at 5.99%.
Changes mean homeowners with a $500,000 mortgage will now have to pay around $80 a month more in minimum payments, which will hit close to $1000 over the course of a year.
June rate hike watch
Economists and markets were largely forecasting the cash rate to remain unchanged in June coming into the bank’s May decision, anticipating the third hike would be the last for now.
Markets are dovish so far having pricing in a 17% chance of another hike next month immediately after interest rates went up on 5 May.
Westpac is a notable outlier at the moment, with chief economist Luci Ellis having laid out a grim forecast at the end of March for hikes in May, June and August.
CBA has also forecast another hike in August, citing lingering economic growth concerns.
Commonwealth Bank senior economist, Belinda Allen. Picture: Supplied
"Uncertainty remains heightened," senior economist Belinda Allen said. "The main watch points will be federal and state budget decisions, wage outcomes, Q2 trimmed mean inflation, and the path of consumer spending."
The RBA has been expecting inflation to peak next month, perhaps as high as 5%, and remains unchanged in that view following this week’s hike.
If the bank deems more tightening is needed next month, Aussies will experience the first cash rate over 4.8% since the end of 2008 during the Global Financial Crisis.
The RBA will announce its next cash rate decision on 16 June.
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