Reserve Bank fears inflation could stay high for another four years

The Reserve Bank has warned inflation could stay high for another two years if labour costs soar and terrorists continued to block a major international shipping route.

That could see borrowers face another $100 a month hike to their mortgage repayments, as variable mortgage rates climbed above the seven per cent mark. 

Inflation fell to a two-year low of 4.1 per cent at the end of 2023 and the RBA is expecting it to moderate back to the top of its 2 to 3 per cent target in late 2025.

But Marion Kohler, the RBA’s head of economic analysis, warned those forecasts were far from certain, and produced a graph showing inflation could remain above 4 per cent into 2026.

‘I’d like to stress that there is substantial uncertainty around forecasts that far out – you can see that in the blue uncertainty “fans” around the central forecast,’ she said.

Should the unthinkable happen, inflation by 2026 would have remained above the target band for five years. 

That would be a far cry from existing RBA forecasts of inflation, by 2026, dropping to the middle of its 2 to 3 per cent target. 

Ms Kohler said higher services-sector costs could keep inflation high if workers regained the power to bargain for higher wages in a tight labour market, with unemployment still low at 3.9 per cent.

‘Services price inflation remains high and broadly based,’ she said.

‘Firms in our liaison program continue to say that they face pressure from higher labour and non-labour costs like professional services, logistics and insurance.

‘The overall cost of labour is one cost consideration for firms when setting the prices of the goods and services they provide, particularly in the relatively labour-intensive services sector.’

Goods inflation could also intensify again if Houthis terrorists in Yemen, backed by Iran, continued to blockade the Red Sea.

‘Recent events in the Red Sea highlight that this moderation in global goods inflation might be bumpy,’ Ms Kohler said.

This would stop ships bound for Australia from travelling from Europe, via the Mediterranean Sea and Egypt’s Suez Canal.

Cargo would have to instead travel around Africa, leading to higher costs for consumers.

Higher inflation could stop home borrowers getting a rate cut, after the RBA in November raised the cash rate for the 13th time in 18 months to a 12-year high of 4.35 per cent. 

That would mean no relief from a 69 per cent surge in monthly repayments since May 2022. 

The 30-day interbank futures market is expecting a rate cut from August but higher inflation could stop that from happening, or even spark another rate rise.

This would see a borrower with a borrower with an average, $600,000 mortgage pay another $100 a month as their variable mortgage rate climbed to 7.04 per cent, leading to monthly repayments of $4,000.