SYDNEY—Australians are once again fretting over rate pains, as an overheated economy forces the central bank to tighten the policy screws.
The Reserve Bank of Australia has raised rates at its first meeting in 2026.A years-long drought of meaningful economic reform under successive governments has condemned Australian households to rapid-fire interest rate hikes whenever the economy even seems to be gathering some steam.
This week, the Reserve Bank of Australia raised rates at its first meeting in 2026, reversing a cut it had made months earlier after admitting it had badly miscalculated inflation forecasts, and price pressures had once again become a significant issue.
RBA Governor Michel Bullock has avoided guidance on market developments, but has made it abundantly clear that he is serious about slaying the inflation dragon.
His comments to the media were peppered with warnings about the dangers of rising core inflation, and the RBA said price rises could remain at the long-term top of its 2% to 3% target band.
It is almost certain that the RBA will raise rates again in May, with a third hike likely in the second half of the year.
The central bank’s own forecasts suggest it will miss its mandatory inflation target for at least another year, and possibly two more, said George Tharenow, chief economist at UBS Australia.
The dire outlook comes despite the RBA’s forecast that the official cash rate could rise to around 4.3% from 3.85% and the Australian dollar will remain strong, he added.
With interest rates rising, unemployment is expected to rise as inflation slows, while the recent current pickup in economic growth is set to peter out, according to the RBA.
Bulls are painfully aware that, after a decade of productivity gains and meager reforms to address the problem, the economy can no longer grow at the pace it did a generation ago.
Even with gross domestic product growth of just over 2% a year, Australia’s economy is badly constrained.
“Productivity—the engine of our economy—is so weak that our nation can’t grow at anything like past rates without a burst of inflation and the equivalent response of higher interest rates,” said Rich Insights economist Chris Richardson.
But if the bull presses the accelerator too hard, steam will come out of the economy’s hood.
Treasurer Jim Chalmers is also feeling the heat, coming under pressure to dramatically cut government spending when he announces the federal budget in May.
State and federal governments have gone on spending sprees in recent years targeting things like social programs and new infrastructure.
Added public demand provided critical support to the economy in the post-pandemic years, but it is now combined with strong private demand to overheat the economy.
Richardson said the government had to tread carefully to avoid increasing spending on the economy.
Against that backdrop, “the road to recovery is long and winding [Australia’s] The quality of life lost looks long and blurry,” he said.
Write to James Glynn at james.glynn@wsj.com
