Australian families face a year of misery with surging rates and inflation. Photo / 123RF
Australian families face a year of misery with surging rates and inflation. Photo / 123RF
Australian families face a year of misery, with the Reserve Bank governor warning interest rates will surge and inflation could peak as high as seven per cent.
Philip Lowe predicted that inflation would hit seven per cent by Christmas and that it wouldn't begin to fall until the first quarterof the next year, while the cash rate would hit 2.5 per cent.
"I think Australians need to prepare for higher - be prepared for higher interest rates," Lowe told ABC's 7.30.
"We had emergency settings during the pandemic, I think that was the right thing to do, but the emergency is over. And it's time to remove the emergency settings and move to more normal settings of monetary policy."
Lowe said he believed it was "reasonable that interest rates get to ... the cash rate gets to 2.5 per cent at some point".
He added the RBA would do "what's necessary" to tackle rising inflation and that the bank was determined to return inflation to between two and three per cent.
"It's unclear at the moment how far interest rates will need to go up to get that," Lowe said.
"I'm confident that inflation will come down over time but we'll have to have higher interest rates to get that outcome."
Lowe admitted that Australian families would find the rise in interest rates tough to take, especially at a time when grocery and fuel prices are rising astronomically.
Last October, the RBA said interest rates would not rise before 2024, only for the cash rate to be put up by 0.5% last week.
"At the individual level some people have taken loans that they may not have wanted to take out in retrospect, but the overall picture, which is really very much the focus of the Reserve Bank, is a pretty resilient economy," Lowe said.
Reserve Bank of Australia Governor Philip Lowe has suggested inflation could rise to seven per cent by Christmas. Photo / Getty Images
"Sometimes my comments get interpreted as me having made a promise, or a very strong statement, that interest rates would stay where they were to 2024. In our own communication, in our own way of thinking, it was very much a conditional statement.
"The economy didn't evolve as we expected, it's been much more resilient and inflation's been higher and we thought we needed to respond to that."
Lowe now believes inflation will peak at around seven per cent in December this year, "and by the time we are into the second half of next year, inflation will clearly be coming down".
Despite all the doom and gloom, the RBA governor insisted the Australian economy will grow "pretty strongly" over the next year as spending increases on the back of the Covid pandemic.
In the meantime, "people have got their savings to draw on", he said.
"Even if income growth is a bit weaker, people have the financial capacity to keep spending.
"There's a big backlog of constriction work to be undertaken and the number of job vacancies is extraordinarily high.
