Chilling warning of another interest rate hike, even as inflation has fallen to a two-year low

The Reserve Bank of Australia has warned that borrowers could face another rate hike, even as inflation has fallen to a two-year low.

Governor Michele Bullock and her monetary policy council left the cash rate at a 12-year high of 4.35 percent on Tuesday afternoon.

But she has rejected any suggestion of a rate cut anytime soon – and in fact suggested a possible rate hike – even as headline inflation fell to a two-year low of 4.1 percent in 2023.

“Inflation continued to decline in the December quarter. Despite this progress, inflation remains high at 4.1 percent,” she said in a statement on behalf of the RBA board.

“The interest rate path that will best ensure inflation returns to target within a reasonable timeframe will depend on the data and evolving risk assessment, and a further rise in interest rates cannot be ruled out.”

Ms. Bullock doubled down during a media conference on Tuesday afternoon when asked about previous expectations of rate cuts.

“We haven't ruled anything out and we haven't ruled anything out,” she said.

“I would say we have maintained the option that more rate hikes may be necessary, but maybe not. There is nothing in and nothing out.'

The RBA governor also revealed she was not particularly confident inflation would moderate to three per cent by 2025, saying it was a five out of ten, citing her predecessor Philip Lowe.

'I think the signs are – my predecessor always talked about the 'narrow path' – I feel like we are potentially on that narrow path, but I also believe that we need to remain very alert to the risks on both sides,” she says. said.

But she said the revised phase three tax cuts are unlikely to keep inflation elevated for longer.

“We don't think this will have any impact on our forecasts,” she said.

Home borrowers have already faced the most aggressive pace of monetary policy tightening since 1989, with the RBA raising rates for the thirteenth time in eighteen months in November.

Monthly mortgage repayments are 69 percent higher than almost two years ago.

The RBA updated its forecasts in November for inflation to return to the top of its 2 to 3 percent target in December 2025 instead of June 2025, and predicted the consumer price index would remain high.

In an updated quarterly monetary policy statement published on Tuesday, the CPI fell to 2.8 percent in December 2025.

“While there are positive signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia,” the RBA board said on Tuesday.

'The board expects that it will take some time before inflation is sustainably within the target range.'

Ms Bullock hinted that the conflict in Gaza and Ukraine could push up petrol prices again, reversing the easing seen in recent months, as real estate problems in China could weigh on iron ore and coal prices and Australian dollar, which would make imports more expensive.

“There also remains a high degree of uncertainty about the prospects for the Chinese economy and the consequences of the conflicts in Ukraine and the Middle East,” she said.

The RBA remains concerned about inflation, even as the 30-day interbank futures market on Monday was still expecting an August rate cut by the Reserve Bank, the first since 2020.

Economist Harry Murphy Cruise of Moody's Analytics said the RBA is now likely to cut rates twice in 2024, starting in September, which would take the cash rate back to 3.85 percent by Christmas and to 3.1 percent in 2025.

The Reserve Bank of Australia has indicated that borrowers could face another rate hike even as inflation has fallen to its lowest level in two years (pictured is an auction in Sydney)

“Against that backdrop, we see the RBA taking a wait-and-see approach, meaning the rate cuts won't happen until September, after the tax cuts have already taken hold,” he said.

'What makes matters even more difficult is that the third phase of tax cuts already included in our baseline forecasts will return cash to households at exactly the same time that the RBA will be trying to take money out of the economy.

“We calculate that the tax cuts amount to a six-month delay in getting inflation back below 3 percent.”

The Reserve Bank will hold eight two-day board meetings in 2024 instead of 11 monthly meetings, following the recommendations of a review.

Ms Bullock will now hold a media conference an hour after each RBA board meeting decision is announced.