SYDNEY (Reuters) – Australia’s central bank revised its inflation forecast upwards on Friday, hinting at how far interest rates may need to rise to bring the country’s cost of living crisis under control.

In its quarterly monetary policy statement, the Reserve Bank of Australia (RBA) warned that core inflation could now hit 4.6% by December, two percentage points higher than its previous forecast. in February.

This would be well above the RBA’s 2-3% target range and inflation would not return to the top of the range until mid-2024, suggesting that a long tightening cycle was underway.

At the same time, unemployment is now expected to fall to 3.6%, its lowest level in 50 years, over the coming year and finally push wages up after years of meager gains.

Annual wage growth is expected to accelerate to 3.0% by the end of this year, from 2.3% currently, and 3.7% by mid-2024.

It was this powerful mix that led the RBA board this week to raise interest rates by 25 basis points to 0.35%, the first increase in more than a decade, and to signal many more increases to come.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” RBA Governor Philip Lowe wrote in the 68-page statement. “This will require a further rise in interest rates over the coming period.”

Markets are anticipating a further rise to at least 0.60% in June, then one move per month to reach 2.75% by Christmas. The RBA’s own forecast is based on rates of 1.75% by the end of the year and a peak of around 2.5% by the end of 2023.

Lowe himself pointed to 2.5% as a rate that would be neutral for the economy, but did not say how quickly or if they could get there.

NOT ALONE

The RBA is not alone in this predicament, with the Federal Reserve rising half a point this week and signaling similar moves in June and July. The Bank of England also rose on Thursday but was notably more pessimistic on the economic outlook.

The sudden rise in Australian borrowing costs has been bad news for Prime Minister Scott Morrison as he faces a tough election campaign based squarely on economic management.

It was also a blow to Australian households who hold a record A$2 trillion in mortgage debt amid one of the biggest property bubbles in the country’s history.

The RBA is confident consumers can ride out these ill winds, thanks in part to an additional A$272 billion in savings accumulated by households during the pandemic.

The central bank expects the economy to grow healthy at 4.2% this year, before slowing to 2.0% in 2023 as rates rise, inflation rises and oil prices moderate. real estate wreaking havoc.

There were many unknowns, however, ranging from novel coronavirus variants to the conflict in Ukraine, to global supply bottlenecks and how households would react to the new reality of higher inflation.

(Reporting by Wayne Cole)