Inflation ticks higher: Will this spur more interest rate hikes?

Inflation climbed higher over the final quarter of 2022, although it wasn’t as lofty as the RBA had previously forecast.

The Consumer Price Index (CPI) rose 1.9 per cent in the December 2022 quarter. The latest jump represents an annual increase of 7.8 per cent and follows consecutive rises in the March (5.1 per cent), June (6.1 per cent) and September (7.3 per cent) quarters.

The most significant price rises were attributed to domestic (+13.3 per cent) and international (+7.6 per cent) holiday travel and accommodation, as well as higher electricity costs (+8.6 per cent).

Will these mounting figures embolden the Reserve Bank of Australia (RBA) to deliver further interest rate rises in the coming months or have we seen the last of cash rate hikes for a while? 

The economic outlook from the RBA’s latest Statement on Monetary Policy suggested that headline inflation was expected to peak around 8 per cent at the end of 2022. December’s 7.8 per cent figure has fallen shy of that projection, which may prompt restraint when it comes to interest rate advancements.

However, most economists were tipping a 7.5 per cent annual increase in prices, according to the ABC. This could mean that inflation remains sticky and that the RBA's attempts to quash it may not be over.

Will interest rates go up again?

During the most recent monetary policy meeting of the RBA Board in December, members noted that inflation in Australia “remained too high” and although it’s anticipated to increase in the coming months, it’s also forecast to ease at some point through 2023.

“A sustained decline in inflation was expected in 2023, as global supply-side issues continue to be resolved, the recent declines in commodity prices work their way through to consumer prices and growth in demand slows,” according to the minutes from the meeting.

“Medium-term inflation expectations remained well anchored, both in Australia and abroad, reflecting expectations that central banks would do what was needed to reduce inflation.”

Over the past nine months, in order to tame inflation, the RBA delivered eight consecutive hikes to the cash rate. The Board doesn’t meet during January, so there were no monetary policy changes during the first month of 2023. 

The cash rate is currently 3.10 per cent. However, all of the big four banks have forecast another 25 basis points’ jump for the next meeting, which is set to take place on February 7, 2023.

This could be devastating for borrowers. Assuming that your lender passes on every single cash rate hike in full to your home loan, as per Westpac’s predictions, and you are currently repaying a variable rate loan, you may find that your monthly repayments are $1,075 more expensive in May 2023 compared to April 2022.

New monthly indicator paints a similar picture of rising inflation 

The latest monthly CPI indicator rose 7.3 per cent in the twelve months to November 2022. The latest jump follows annual increases to monthly inflation numbers during both September (7.3 per cent) and October (6.9 per cent).

Inflation is affecting every aspect of Australian finances at the moment, from the cost of lettuce to home loan interest rates. So how high is inflation likely to go, and when will it reach its peak? We analysed what some of Australia’s leading financial institutions had to say in their recent forecasts. The shared consensus is, generally, that the situation remains fluid and we still have a ways to go before there’s some relief.

The other question on the lips of economists, analysts, actuaries, executives, journalists and, most importantly, everyday Australians is: Will we experience a recession in 2023? Of course, the answer is complicated.

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