Inflation Will Hit 6 Percent by the End of 2022: Reserve Bank of Australia

Shoppers gather to buy fruit and vegetables at a store in the suburb of Fairfield in Sydney, Australia, on July 9, 2021. Lisa Maree Williams/Getty Images

After the most recent surge in inflation to 5.1 percent during the March quarter, vastly surpassing expectations, the Reserve Bank of Australia (RBA) has revised its inflation forecast to 6 percent over the second half of 2022.

“As observed in other advanced economies, consumer price inflation in Australia has picked up markedly since the middle of 2021, and the outlook for inflation has again been revised higher,” the RBA said in its quarterly monetary policy statement.

The central bank noted that inflationary pressures remain elevated in many advanced economies, and recent inflation figures had been “higher and more persistent” than expected.

“Australia has been affected by these global inflationary pressures, but to a lesser extent than some other advanced economies. Headline and underlying inflation were both higher in the December quarter than the Bank had expected,” the RBA said.

To combat the surging levels of inflation, driven significantly by fuel, dwelling construction costs, and durable item prices, the bank warns of more consecutive cash rate hikes to come.

The RBA made its first interest rate hike in over a decade in May, raising the cash rate from 10 to 35 basis points (bp).

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead,” it said.

Fuel prices are listed on a fuel price board at a petrol station in Melbourne, Australia, on March 14, 2022. AAP Image/Diego Fedele

Westpac Bank expects a hike of 40 bp in June and subsequent 25 bp hikes for the following months until early 2023.

“The best approach is to tighten more aggressively in the early stages of the cycle as a way of guarding as much as possible against the potential risks in the current environment,” Westpac Chief Economist Bill Evans said.

Commonwealth Bank said the RBA’s 2023 forecasts should be taken with “a pinch of salt” because economic outcomes for 2023 would be “heavily dependent” on how tough the board delivers its hikes.

“Our view is that a shallow tightening cycle will be required to maintain a strong economy in 2023,” Commonwealth Bank Chief Head of Australian Economics Gareth Aird said.

He highlighted that the RBA would need to “thread the needle” in its future monetary decisions due to the high levels of household debt across the country.

“Households are more sensitive to changes in interest rates than at any other time because the level of household debt to income sits at a record high,” Aird said.

Meanwhile, with RBA forecasts for headline inflation and wages growth at 6 and 3 percent, respectively, by the end of 2022, meaning Australians will be looking at a 3 percent drop in real wages.

Surging living costs is also one of the top concerns for Australians heading into the federal election.

The Australian National University (ANU) surveyed 3,500 voters and found that 64.7 percent of the respondents believed reducing living costs should be the top priority of the next federal government.

This was followed by fixing aged care, improving the economy, and reducing health care costs.

The Australian Automobile Association (AAA) also revealed that the average weekly fuel costs had jumped 40 percent from 12 months to March 31.

Alfred Bui contributed to this article.