Inflation bubble’s busted

But rates may rise further

Inflation will decline faster than expected as the economy strains under the weight of rapid rate rises, the cost of living and soaring rents, the Reserve Bank says.

In an economic update just days out from the Budget, the central bank confirmed inflation had peaked but warned the era of interest rate increases was not necessarily over.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve,” the RBA said.

Earlier this week the RBA shocked markets and homeowners with an unexpected increase in the cash rate, up 25 basis points to 3.85 per cent.

The Commonwealth Bank on Friday was the last of the big four banks to pass on the hike.

Rate City’s Sally Tindall said the May rate rise could be the one that sank “some families’ budgets into the red”.

While the RBA update acknowledged the “painful squeeze” the fast pace of rate increases had on households, it reiterated its “resolute determination” to trim inflation.

The bank forecasts the consumer price index to fall to 6.3 per cent in June and to 4.5 per cent by December before returning to the top end of its 2 to 3 per cent target range by mid-2025.

“The longer inflation remains above target, the greater the risk that inflation expectations rise and price- and wagesetting behaviour might adjust accordingly,” it said. “If this were to eventuate, the end result would be even higher interest rates, and a larger rise in unemployment would be required to bring inflation back to target.”

Rent, one of the main drivers of inflation, was expected to pick up over the next year, the RBA warned.

“A shortfall in housing supply, relative to strong demand from a rising population, is expected to result in continued upward pressure on rents,” the statement said.

Governor Philip Lowe (pictured) has previously said the reduction in the average number of people living in households during the pandemic had a role in the rental crisis.

But the update noted that due to the sharp increase in rent prices, more people were looking for housemates.

The bank also cut its nearterm economic forecasts. Economic growth (1.7 per cent) is expected to be half a percentage point lower than forecast three months ago. The bank expects the unemployment rate to increase slightly in June, to 3.6 per cent, before reaching 4 per cent by year’s end.