RBA interest rates: Michele Bullock has put home loan borrowers on notice about inflation

If inflation continues to overshoot the bank’s upgraded price pressure forecasts, the RBA will have little choice but to raise the 4.35 per cent cash rate, which it held steady as expected on Tuesday.The RBA’s board meeting statement adds some new rhetorical potency to the inflation fight. It puts borrowers on notice.

The RBA’s numbers don’t lie that the economy has a persistent inflation problem that is proving harder to slay than hoped. Adding to inflation is the tight jobs market proving far more resilient than anticipated, with the bank admitting it is “tighter than full employment and is easing only gradually”.The RBA estimates that the near-50-year low unemployment rate of 3.8 per cent and wages growth exceeding 4 per cent are responsible for about one-third of the forecast inflation upgrade.

But almost magically, the central bank still has the medium-term inflation outlook unchanged, scraping below 3 per cent by late 2025 and to 2.6 per cent by mid-2026 – in both headline and underlying terms. For the Albanese government, rate cuts before a federal election, due by May next year, look doubtful, with the possibility of the cash rate moving higher before polling day.While per-person spending is shrinking, there is a legitimate question about whether monetary policy is tight enough to quell inflation back to 2.5 per cent.

Aggressive mortgage competition by banks and the delayed roll-off of fixed rate borrowers means only 3.35 percentage points of the 4.35 percentage point rise in the RBA cash rate has been passed through to the average borrower.Home borrowers are contributing more to offset and redraw accounts than mid-2023 and the pre-pandemic average.

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