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RBA sees inflation at 7% as business costs spike

The Reserve Bank of Australia (RBA) Governor, Philip Lowe, has warned Australians that inflation is set to increase through the end of 2022 and hit a peak of about 7%.

22 June 2022 

In a speech to the American Chamber of Commerce in Australia (AmCham), RBA Governor Philip Lowe explained the reasoning behind the recent cash rate increases, citing cost pressures on business and a growing inflation forecast.

“The increase in the cash rate in May followed the higher-than-expected CPI outcome in the March quarter and evidence from business surveys and our own liaison that growth in labour costs had picked up and would continue to do so in the months ahead. In June, we decided to make a bigger, 50 basis points, adjustment on the basis of the additional information suggesting a further upward revision to an already high inflation forecast. The board also gave consideration to the fact that the level of interest rates was still very low,” he said.

This is in line with the NAB’s Q1 SME Business Survey, which was released ahead of the first interest rate hike in May. NAB CEO Alan Oster said, “As we have seen in all our business surveys, SMEs are facing very elevated cost pressures and this is translating to price increases, although margins remain under pressure. Labour and materials availability continue to be a constraint for a large share of firms.”

Mr Lowe also warned that inflation would continue to rise beyond the earlier RBA forecast of a 6% peak.

“Since early May, petrol prices have risen further due to global developments and the outlooks for retail electricity and gas prices have been revised higher due to pressures on capacity in that sector. As a result, we are now expecting inflation to peak at around 7 per cent in the December quarter. Following this, by early next year, we expect that inflation will begin to decline,” he said.

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Mr Lowe made it clear that although interest rates would continue to climb, economic conditions would determine the pace at which they increase.

“As we chart our way back to 2 to 3% inflation, Australians should be prepared for more interest rate increases. The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation. I want to emphasise though that we are not on a pre-set path. How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market,” he said.

Following the cash rate announcement earlier in June, Australian Chamber of Commerce and Industry CEO Andrew McKellar said that while the 50-basis point increase was “more aggressive than what many analysts predicted, the decisive action taken by the Reserve Bank was understandable to normalise monetary settings and tame inflationary pressures".

He said inflation was "hitting businesses especially hard, particularly surging energy prices.

“Having survived the pandemic, small business owners are now confronted with supply chain constraints and worker shortages, forcing them to raise their prices or absorb increases within already thin margins.

“As well as increasing costs to consumers, small business owners will face higher repayments on existing loans and will need to factor in increased rates on new investments.”

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