RBA signals more tightening to curb inflation

Reserve Bank of Australia assistant governor and chief economist Sarah Hunter said the central bank is “not quite yet” done fighting inflation, signaling that another interest rate increase is likely when policymakers meet early next month. She explained that the RBA board has put through four rate hikes this year to keep tackling inflation, reflecting an ongoing commitment to bring price growth back to target.

Hunter declined to pre-empt the board’s formal decision on interest rates but stated that, when asked whether the RBA had done enough to tame inflation, “Unfortunately, not yet.” She added that the bank expects “a little bit longer to go” before conditions start to improve and inflation recedes to a low and stable level.

At the end of September, the RBA lifted its policy rate to 4.6%, described as the highest level in 15 years. Hunter said further tightening would add downward pressure on property prices, with higher borrowing costs weighing on the housing market.

Recent housing indicators show the strain, with the combined home auction clearance rate at 48% last week, down from 67% a year earlier. The higher rate environment is feeding directly into mortgage repayments, intensifying pressure on many households and contributing to weaker housing activity.

Hunter acknowledged that the RBA is using rate hikes to deliberately squeeze household budgets, aiming to force a reduction in spending that will help lower inflation. She described the situation for mortgage holders as “really, really tough” and said it weighs on policymakers, but argued that reducing inflation is necessary “for the good of everybody.”

She said interest rates are the most effective tool to bring down inflation, noting that earlier approaches such as wage freezes and targeting credit or money supply growth were not particularly effective. The strategy relies on Australians cutting back, and Hunter said the bank knows that higher rates “do work to bring down inflation,” even though there is a cost.

Hunter said inflation has been reduced over the last few years but has lifted again recently. She attributed the renewed pressure partly to an oil shock and partly to domestic factors that have pushed up costs. These influences are feeding into prices across “absolutely everything” households are buying.

She highlighted government spending as “definitely part of the picture,” saying that state and federal outlays are contributing to domestic economic demand and capacity pressures. This additional demand, combined with higher energy costs, has complicated the disinflation process and reinforced the case for maintaining restrictive monetary policy.

Hunter said the RBA’s objective is to bring demand back into balance with supply so that inflation trends lower and returns to the low and stable level targeted by the central bank. Once that balance is restored, she said, inflation should become something people “can just forget about.”

While acknowledging the immediate hardship from higher borrowing costs and stalled household spending, Hunter reiterated that the bank sees more work ahead before declaring victory over inflation. She expressed hope that in a few years inflation and cost-of-living pressures will have eased to the point where they are no longer a central concern for households.