Mortgage holders warned of more interest rate pain amid stubborn inflation

Frustrated mortgage holders could face higher interest rates, as the Reserve Bank is forced into an “uncomfortable” spot between fighting inflation and stopping a recession.

Ahead of Wednesday’s official figures, economists warn the fight against inflation is far from over, with expectations that cost-of-living will come in above the central bank’s target.

AMP predicted headline inflation will fall by 0.4 per cent month-on-month partly due to a 15 per cent fall in fuel prices.

Even with the fall, annual inflation is tipped to come in at 4.3 per cent.

Meanwhile, HSBC warns the Reserve Bank’s all important trimmed mean inflation rate – due to it stripping out seasonal and volatile items such as fuel – is tipped to come in at 3.5 per cent.

Both of these figures are well above the Reserve Bank aim of a 2-3 per cent inflation increase.

HSBC chief economist Paul Bloxham says runaway inflation will force the Reserve Bank into making an “uncomfortable choice” between fighting inflation and keeping the economy afloat.

“Our view is that the downswing began in March and is already clear in a range of indicators,” Mr Bloxham said.

“The only question has been how big the downturn will be and what would drive it.”

After its rates meeting last Tuesday the Reserve Bank kept the official cash rate on hold at 4.35 per cent following three consecutive rate hikes.

The official cash rate has gone from 3.60 to 4.35 per cent, with the previous three 0.25 per cent increases have already added around $342 to monthly repayments on the average loan of around $736,000, adding up to an extra $4,128 a year.

A fourth hike would have lumped another $114 onto average monthly repayments. Combined with the earlier hikes, that would have added $5,472 to costs over the year.

Rates are at their highest point since 2011, but the central bank themselves conceded inflation is far from returning to target.

In its statement on monetary policy the RBA’s most recently publicly available forecasts predicted that core inflation won’t hit the midpoint of its 2-3 per cent target band until mid-2028.

Reserve Bank governor Michele Bullock said in a press conference following the rate decision that the central bank would go as far as necessary to slow inflation, but stopped short of calling a recession.

“We don’t want to put the economy into a recession, but we want to slow it enough to the inflation rate back down to our target rate of 2.5 per cent, while trying to keep employment growing and the unemployment rate as low as possible,” she said.

“We are not aiming to put the economy into a recession, but this is why it is such a difficult time and these are very difficult decisions.

“In some ways it would be very easy – and some countries did this – they put interest rates up much higher than we did and their unemployment rate went up and they ended up in a situation where output was declining. We haven’t had that and I really hope we don’t have to have that.”

AMP chief economist Shane Oliver stopped short of calling a recession but said there’s more to do to fight inflation, but predicts more interest rate pain for households.

“We are continuing to allow for a further rate hike in August and have another one pencilled in for November reflecting the still rising trend in underlying inflation and risks that it will take longer to control,” Mr Oliver said.

Last month’s official figures released by the Australian Bureau of Statistics show yearly headline inflation fell from 4.6 per cent in March to 4.2 per cent in April.

But the important trimmed mean inflation rate rose to 3.4 per cent for the 12 months to April, showing underlying price pressures are still in the Australian economy.