Warning stubborn inflation could mean interest rates rise again

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The Reserve Bank of Australia is holding its meeting today and tomorrow to fix interest rates amid warnings the battle against inflation is not finished.

While another hike is unlikely at the conclusion of the central bank meeting, recent higher-than-expected quarterly inflation data means rises later in the year can’t be discounted.

Former governor of the central bank Philip Lowe added a note of caution for mortgage holders, telling The Australian Financial Review the fight against inflation “isn’t done”.

“I understand that most people hope the peak has been reached and it may well have, but it might not have,” he said.

“People have been asking me [about rates] through the course of the year and I’ve been reminding them there is still two-way risk.”

Lowe said two months ago markets and economists were tipping interest rate cuts.

“At the time I said, ‘well just hold on, there’s still two-way risk here’ and the job of getting inflation back to target isn’t done and a succession of upside surprises would mean the case for increasing interest rates would mount.

“We’ve had one upside surprise, the underlying inflation pressure in the economy is still there and getting back to 2.5 per cent sustainably is not yet guaranteed.

“So there still has to be two-way risk.”

In the 12 months to March, the consumer price index increased 3.6 per cent above the RBA’s indicative forecast of 3.5 per cent.

That figure was also above the central bank’s target of 2.5 per cent, which it is aiming for by 2026.

Another former RBA governor Glenn Stevens said last Friday that “low inflation is not yet assured … and the prospects for interest rates are unclear”.

The RBA didn’t consider dropping rates at its last meeting in March, but also didn’t put an increase on the table.

Governor Michele Bullock has given little indication about when rates are likely to start easing, saying the bank isn’t “ruling anything in or out”.