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RBA warning: Inflation and rates to surge

Eliza Bavin
·Personal Finance Editor
Updated ·2-min read
A composite image of Australian currency and RBA governor Philip Lowe.
RBA governor Philip Lowe has told Aussies to brace themselves for higher prices. (Source: Getty)

Reserve Bank of Australia (RBA) governor Philip Lowe has warned the cost of living is set to climb even higher and the bank will have no choice but to hike rates to help bring prices down.

Speaking for the first time since the RBA’s larger-than-expected 0.50 per cent hike this month, Lowe said Aussies needed to prepare for higher inflation.

Lowe said he expected inflation to hit 7 per cent by the end of the year - up from the current 5.1 per cent.

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"That's a very high number and we need to be able to chart a course back to 2-3 per cent," Lowe said on ABC's 7.30 on Tuesday.

“I'm confident we can do that but it's going to take time.

"With inflation being as high as it is, and with interest rates as low as they are, we thought it was important to take a decisive step to normalise monetary conditions and we did that at the last meeting."

Lowe said it was reasonable to expect the cash rate would get to 2.5 per cent at some point, but said it would be driven by events.

It was only last year the RBA had been expecting to keep the cash rate low until 2024, but Lowe said that was never a promise.

"The economy didn't evolve as we expected,” he said.

“It's been much more resilient and inflation has been higher. We thought we needed to respond to that.”

What would a 2.5 per cent cash rate mean?

Although we have grown accustomed to super-low rates, Lowe has indicated a cash rate of 2.5 per cent is considered ‘neutral’.

Of course, a cash rate of 2.5 per cent also means those with variable mortgage rates will be paying more per month.

RateCity.com.au data found that someone with a $500,000 mortgage, with 25 years left on the loan, on the average variable rate could be paying $652 more per month.

Someone with $750,000 left on their loan would be paying $977 extra per month, and someone owing $1 million would be paying an extra $1,303 per month.

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