The Reserve Bank has warned that inflation could remain high for another two years if labor costs soar and terrorists continue to block a major international shipping route.
That could leave borrowers facing another $100-a-month increase in their mortgage payments as variable mortgage rates rise above the seven percent mark.
Inflation fell to a two-year low of 4.1 percent at the end of 2023 and the RBA expects it to moderate to the peak of its target of 2 to 3 percent at the end of 2025.
But Marion Kohler, head of economic analysis at the RBA, warned that those forecasts were far from certain and produced a graph showing inflation could remain above 4 percent until 2026.
“I would like to emphasize that there is substantial uncertainty around forecasts this far out – you can see that in the blue ‘fans’ of uncertainty around the central forecast,” he said.
The Reserve Bank has warned inflation could remain high for another two years if labor costs soar and terrorists continue to block a major shipping route (pictured, a Sydney waitress).
If the unthinkable happened, inflation by 2026 would have remained above the target band for five years.
That would be a far cry from the RBA’s current forecasts for inflation, by 2026 falling to half its target of 2 to 3 per cent.
Kohler said higher service sector costs could keep inflation high if workers regained the power to negotiate higher wages in a tight labor market, with unemployment still low at 3.9 percent.
“Service price inflation remains high and broad-based,” he said.
‘Companies in our link program continue to say they face pressure from higher labor and non-labor costs, such as professional services, logistics and insurance.
“Total labor cost is a cost consideration for businesses when setting prices for the goods and services they offer, particularly in the relatively labor-intensive service sector.”
Goods inflation could also intensify again if Houthi terrorists in Yemen, backed by Iran, continued to blockade the Red Sea.
“Recent events in the Red Sea highlight that this moderation in global goods inflation could be bumpy,” Ms Kohler said.
This would prevent Australia-bound ships from traveling from Europe through the Mediterranean Sea and Egypt’s Suez Canal.
Instead, cargo would have to travel through Africa, resulting in higher costs for consumers.
Marion Kohler (right), head of economic analysis at the RBA, warned that official forecasts were far from certain and produced a graph showing inflation could remain above 4 percent in 2026.
If the unthinkable happened, inflation by 2026 would have remained above the target band for five years.
Higher inflation could prevent home borrowers from getting a rate cut, after the RBA in November raised the cash rate for the 13th time in 18 months to a 12-year high of 4.35 per cent.
That would mean there will be no relief from the 69 percent increase in monthly payments from May 2022.
The 30-day interbank futures market expects a rate cut starting in August, but higher inflation could prevent that from happening, or even trigger another rate hike.
This would cause a borrower with an average mortgage of $600,000 to pay another $100 a month while their variable mortgage rate rose to 7.04 percent, leading to monthly payments of $4,000.