Reserve Bank bracing for inflation to hit 5 per cent by June 2026, fears higher oil prices will hit economy

The Reserve Bank is bracing for inflation to soar to five per cent by June for the first time in three years as a result of crude oil prices remaining at $US100 a barrel, the minutes of this month’s meeting have revealed. Despite a close vote, RBA monetary policy board members were nervous about consistently higher oil prices feeding through to other parts of the economy when they raised the cash rate by another 25 basis points to 4.1 per cent on March 17. The RBA is worried that headline inflation will hit 5 per cent an on annual basis by June, reaching levels last seen in the September quarter of 2023 during its last period of aggressive hikes. This would have the consumer price index at a level 0.75 percentage points higher than its February forecast, made less than a month before the US strikes on Iran sparked a wider part in the Middle East and a blockade of the Strait of Hormuz. “Sustained higher oil prices would also boost inflation more broadly over time as input costs for firms rose and some of this effect was passed onto consumers,” the Reserve Bank said. “Members noted that, consistent with this analysis, short-term inflation expectations had increased further following the onset of the current conflict.” The Reserve Bank’s fears about near-term inflation are even more dire than Treasury modelling, which sees the 5 per cent inflation level being reached in the next financial year. Despite the inflation threat, vote was close with five members of the RBA’s monetary policy board opting to raise rates as four chose to keep them on hold.