Economists broadly expect the Reserve Bank of Australia to lift interest rates by 25 basis points to 3.85 per cent when it meets on Tuesday, following a recent uptick in consumer price inflation. If delivered, it would mark the first rate increase in two years and signal a shift toward a more assertive stance on inflation control.
For households, the immediate effect would be higher mortgage repayments. Borrowers are likely to face increased servicing costs in the near term, adding further pressure to household budgets already stretched by higher living costs. However, the longer-term payoff could be lower and more stable inflation, which would ultimately reduce borrowing costs over time.
Macquarie University's Business Outlook Scenarios Survey (BOSS), which tracks the expectations of more than 500 Australian firms, shows businesses expect CPI inflation to rise over the next 12 months. Inflation is forecast to climb from a low of 2.4 per cent in August last year to above 3.4 per cent by January 2026 — well above the Reserve Bank's 2.5 percent mid-point inflation target.
How inflation evolves from here will depend critically on how businesses respond, who must decide whether higher inflation translates into their own production costs, and whether those cost pressures justify changes to their pricing strategies.
So far, the BOSS survey shows business cost expectations have not fully adjusted to higher inflation, and pricing behaviour has remained relatively contained. History suggests, however, that if elevated inflation persists, cost pressures will eventually emerge.
If inflation remains high, workers will start to seek higher wages to preserve their purchasing power. Rising wages will further lift business costs, forcing firms to raise prices. Those higher prices then feed back into inflation, lifting inflation expectations and creating a self-reinforcing vicious cycle.
Once this process takes hold, restoring inflation could become significantly more difficult, and economically costly. It could require a sharp, and substantial increase in the cash rate, which will ultimately hurt mortgage holders even more.
This is why many economists argue that a hawkish policy response is warranted. Acting early to restrain inflation and inflation expectations may impose near-term pain, but could prevent the far greater damage in the long term.
Dr Ben Zhe Wang , Associate Professor of Economics in the Macquarie Business School, is available for expert comment on this topic to the media. Contact the Macquarie University communications team at [email protected] or on +61 (2) 9580 6766.
