Reserve Bank Governor Philip Lowe warns inflation will hit 7 per cent this year

Reserve Bank Governor Philip Lowe warns inflation will hit 7 per cent this year

As Australia’s cost of living nightmare gets worse by the day, one of the nation’s top bosses has warned of the reality of what’s to come.

Federal Treasurer Jim Chalmers has warned inflation is Australia’s “defining challenge” after Reserve Bank governor Philip Lowe predicted it will hit 7 per cent this year.

In a speech to the American Chamber of Commerce in Australia on Tuesday morning, the RBA boss said the board had expected an inflation peak of 6 per cent in 2022, but that the forecast had been pushed even higher since early May, when petrol prices began to skyrocket.

Now, the RBA is bracing for a peak of 7 per cent in the December quarter – up from the current rate of 5.1 per cent.

And while he said he expected it to decline by early next year, it would take a “couple of years” before inflation returned to normal.

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“It is going to be some years, I think, before inflation is back in the 2-3 per cent range. Over the next couple of years, it will gradually come down,” he said.

“That is why it is important that we chart this path back there and people have confidence that we will do that.”

He said inflation should begin to ease in the months ahead due to three major factors – a reduction in supply chain disruptions caused by the pandemic, the tightening of monetary policy and because some high prices will likely fall back down.

Speaking afterwards, Mr Chalmers thanked Dr Lowe for his “candour and his frankness”.

“The expectation across the board is that inflation will get worse before it gets better, and that interest rates will get higher as well,” Mr Chalmers said.

“This is making life very difficult for Australians already, and for Australian industry, as the prices for goods and services and supplies go through the roof.

“We’ve got a lot going for us in this country and in our economy, but we can’t just pretend away these big challenges that we face in the next six or twelve months in particular.

“It’s possible to be optimistic about the future of our economy and the future of our country, while also recognizing that we have to navigate together a really tricky, really difficult, combination of circumstances.

“What’s necessary here is some patience, some persistence, a lot of collaboration, and working together.”

Dr Lowe added that inflation was increasingly coming from inside Australia rather than as a result of global factors, but pledged to do “what is necessary” to stop it rising too far.

“Following the strong recovery from the pandemic, growth in domestic spending is now testing the ability of the economy to meet the demand for goods and services,” Dr Lowe said.

“This is particularly evident in the labor market, with many firms reporting that the availability of labor is a significant constraint on their ability to operate and/or expand.

“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues ​​people’s savings. It is also regressive, hurting most those who are least well equipped to protect themselves.”

Mr Chalmers echoed the RBA’s prediction on a recession, saying, “we’re not working on the expectation at this point of that risk occurring or eventuating.

“We have reason to be cautiously optimistic about the future of our economy, but first we have to navigate these difficulties which are right ahead of us.”

Prepare for more interest rate bread

Dr Lowe also confirmed that more interest rate hikes were a certainty.

“As we chart our way back to 2 to 3 per cent inflation, Australians should be prepared for more interest rate increases,” he said.

“We decided to make a bigger 50 basis-point adjustment on the basis of the additional information suggesting a further upward revision to an already high inflation forecast.

“The board also gave consideration to the fact that the level of interest rates was still very low.

“I want to emphasize though that we are not on a preset path. How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labor market.”

However, he said he didn’t believe a recession was on the horizon for Australia, given “the fundamentals are pretty positive still”.

RBA’s ‘reputational damage’

Dr Lowe also conceded the RBA suffered “reputational damage” when it attempted to wind back its Covid-19 stimulus program.

During his speech, he admitted that a review into the RBA’s policy of pinning interest rates at 0.1 per cent out to three years during the pandemic had caused a “disorderly” end to the program in late 2021 which had “caused some reputational damage to the bank”.

Meanwhile, Australians are nervously awaiting the RBA’s next interest rate decision on July 5, when the board is widely expected to vote in another “super-sized” rate rise of 50 basis points, which would bring the official cash rate up to 1.35 per cent .

It comes after a 25 basis point hike in May and a 50 basis point jump earlier this month, with the cash rate now sitting at 0.85 per cent.

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