Reserve Bank’s admits higher interest rates won’t bring down inflation any time soon

The Reserve Bank has admitted that aggressive rate hikes will not necessarily bring inflation down quickly.

Australian inflation rose 7.3 percent in the year to September – a level not seen since 1990.

It was also more than double the Reserve Bank’s longstanding target of two to three percent.

A new RBA forward guidance paper released Tuesday admitted that it was struggling to meet an inflation target.

“Experience in Australia and elsewhere has shown that inflation is difficult to fine-tune within a narrow band,” it said.

The Reserve Bank has admitted that aggressive rate hikes will not necessarily bring inflation down quickly. Inflation in Australia grew 7.3 per cent in the year to September at levels not seen since 1990 (pictured a Woolworths shopper in Sydney)

The Reserve Bank’s monetary policy statement released earlier this month projects annual inflation to remain above its target through 2025, after falling to 3.25 percent in December 2024.

Should that prediction come true, Australian inflation would have remained above target for three years.

Apart from the introduction of the GST in July 2000 and the mining boom in 2008, Australia has not experienced a long period of out-of-target inflation since the RBA set a target of two to three percent in 1993.

Even then, inflation remained above target for a year, not three years, as the RBA fears with this current period of consumer price pressure.

In another quiet mea culpa, the RBA admitted it made a mistake last year in suggesting interest rates would remain at a record low of 0.1 percent until 2024 “at the earliest.”

“Outlooks on interest rates will not always be given, although the board will continue to outline how monetary policy settings will be adjusted in response to changing economic conditions,” it said.

Apart from the introduction of the GST in July 2000 and the mining boom in 2008, Australia has not experienced a long period of out-of-target inflation since the RBA set a target of two to three percent in 1993

RBA Governor Philip Lowe suggested last year that interest rates would not rise for the next three years, but those statements were made before the Russian invasion of Ukraine led to higher crude oil prices.

But since May, borrowers have faced seven straight monthly rate hikes, pushing cash rates to a new nine-year high of 2.85 percent.

This has seen a borrower with an average $600,000 mortgage struggle with an $839 increase in monthly mortgage payments, rising this month to $3,145 from $2,306 just over six months ago.

This came as a typical Commonwealth Bank floating rate rose from 2.29 percent in May to 4.79 percent, as the RBA embarked on its most aggressive monetary policy tightening since 1994.

RBA Governor Philip Lowe suggested last year that interest rates would not rise for the next three years, but those statements were made before Russia’s invasion of Ukraine led to higher crude oil prices

While the RBA admitted to making a mistake in announcing interest rate forecasts, the RBA explained that it put in place this policy to affect government bond yields — the annual rate of return investors get for buying Australian government debt.

“Forward guidance refers to a central bank communicating in some way about the future course of monetary policy,” the RBA said.

A common form of forward guidance is when the central bank makes a qualitative or general statement about the likely direction or movement of interest rates.

If forward guidance is effective, it can influence interest rate expectations and thus interest rates further down the yield curve and therefore financial conditions. ‘

The Reserve Bank also complained that it was difficult to give Australians a coherent message about the economy.

The economic environment is complex by nature and often highly uncertain, making simple reporting difficult.

US headline inflation in the year to October was 7.7 percent.

U.S. headline inflation in the year to October was 7.7 percent (pictured is a Walmart near Chicago)

AMP senior economist Diana Mousina predicted headline inflation in the US would fall to 4.5 percent by the end of 2023 as prices for goods moderated faster than those for services.

“US inflation has started surprisingly at the bottom, which means that US inflation is likely to have peaked for this current cycle,” she said.

“Inflation is slowing in the goods sector, where prices also rose the most in the past 12 months.”

Higher inflation in the US means US borrowers will face a higher US federal funds rate of 3.75 percent to 4 percent – a 14-year record.

The large difference between Australian and US interest rates strengthens the US dollar and in turn weakens the Australian dollar, making imports more expensive and inflation high.