Reserve Bank fears inflation could stay high for another four years – here’s what that means for your mortgage

The Reserve Bank has warned that inflation could remain high for another two years if labor costs rise and terrorists continue to block a key international shipping route.

That could result in borrowers facing another $100 per month increase in their mortgage payments as variable mortgage rates rise above seven percent.

Inflation fell to a two-year low of 4.1 percent at the end of 2023, and the RBA expects it to moderate back to the top of its target of 2 to 3 percent by the end of 2025.

But Marion Kohler, the RBA’s head of economic analysis, warned these predictions were far from certain, producing a chart showing inflation could remain above 4 percent until 2026.

“I would like to emphasize that there is significant uncertainty around forecasts this far out – you can see that in the blue uncertainty ‘blowing’ around the central forecast,” she said.

If the unthinkable happened, inflation would have remained above the target range for five years by 2026.

That would be a far cry from existing RBA forecasts that inflation would fall to halfway to the 2 to 3 percent target by 2026.

Kohler said higher costs in the services sector could keep inflation high if workers regain the power to bargain for higher wages in a tight labor market, where unemployment remains low at 3.9 percent.

“Service price inflation remains high and broad-based,” she said.

“Companies in our liaison program continue to say they are under pressure from higher labor and non-labor costs, such as professional services, logistics and insurance.

‘Total labor costs are a cost consideration for businesses when setting the prices of the goods and services they provide, especially in the relatively labor-intensive services sector.’

Goods inflation could also rise again if Houthis terrorists in Yemen, backed by Iran, continue to block the Red Sea.

“Recent events in the Red Sea highlight that this moderation in global goods inflation could be bumpy,” Kohler said.

This would prevent ships bound for Australia from traveling from Europe via the Mediterranean Sea and Egypt’s Suez Canal.

The freight would instead have to travel through Africa, which would lead to higher costs for consumers.

Marion Kohler (right), the RBA’s head of economic analysis, warned that official forecasts were far from certain, producing a chart showing inflation could remain above 4 percent until 2026.

If the unthinkable happened, inflation would have remained above the target range for five years by 2026

Higher inflation could prevent home loans from seeing a rate cut after the RBA raised the cash rate for the 13th time in 18 months to a 12-year high of 4.35 percent in November.

That would not alleviate the 69 percent increase in monthly repayments since May 2022.

The 30-day interbank futures market expects a rate cut from August, but higher inflation could hold this back or even lead to another rate hike.

This would leave a borrower with an average mortgage of $600,000 paying an additional $100 per month while the variable mortgage rate rose to 7.04 percent, leading to monthly repayments of $4,000.