STEPHEN JOHNSON: Reserve Bank of Australia chief economist Sarah Hunter worried about inflation expectations

The Reserve Bank wants Australians to remain anxious enough to cut their spending even if inflation has fallen to levels last seen before the Iran war pushed up crude oil prices — diluting expectations of another rate hike.

Whether it’s a tightrope or a so-called “narrow path”, the RBA’s monetary policy board is grappling with a classic economic Catch 22.

Inflation has consistently been above the Reserve Bank’s 2-3 per cent target for almost a year, well before US President Donald Trump’s strikes on Iran caused average petrol prices to soar above $2 a litre.

But raising interest rates again, for the fourth time this year, would only crush an already weak economy and squeeze much-needed home building activity during a housing crisis.

Headline inflation could well climb again with Prime Minister Anthony Albanese on Thursday confirming the 16-cent-a litre reduction in fuel taxes would not be extended beyond August 2.

The Reserve Bank’s chief economist, Sarah Hunter, is worried Australians will expect inflation to stay high which could potentially lead to higher prices for longer if consumers don’t cut their spending in anticipation of another rate hike.

“We obviously want to get inflation back down and what we want to make sure is we don’t see higher expectations become embedded — that is really critical for a central bank,” Dr Hunter told a Barrenjoey chat in Sydney on Thursday.

“Inflation is too high, the cost of living is going up faster than people want it to, than people are comfortable with.

“We have to get inflation down, that is what we can do to help relieve some of that burden.”

She is the first RBA official to speak since official data showed inflation moderated to 3.8 per cent in June, down from May’s annual pace of 4 per cent to be at the lowest level since February before the US strikes on Iran pushed up crude oil prices.

The RBA’s assistant governor spoke shortly before the Australian Bureau of Statistics revealed a 47.1 per cent surge in petroleum prices during the June quarter, marking the biggest surge over three months in records going back to 1983.

This occurred as import prices rose by 5.7 per cent over the quarter, marking the biggest increase since the end of COVID-19 lockdowns in late 2021.

Dr Hunter admitted higher crude oil prices would make it hard for the Reserve Bank of Australia to raise interest rates again during a time of weak economy activity.

“This type of shock is really tricky for central banks because it just worsens the trade-off,” she said.

The trade-off, of a weakening economy, is already showing as a result of the Reserve Bank’s three hikes this year, that have taken the cash rate to 4.35 per cent.

NAB, one of Australia’s big four banks, has revealed a 15 per cent fall in the number of mortgage applications over the past three months.

House prices are already falling in Sydney and Melbourne while growth has slowed in the previously strong markets of Brisbane, Perth and Adelaide.

Labor’s plan to build 1.2 million homes over five years is also well behind scheduled with 204,649 residential projects approved during the last financial year, new ABS data showed, which was well below of the 240,000, on average, needed a year to be in with a chance.

The 393,426 new residential homes approved since July 2024 are still 86,574 short of the 480,000 number needed to meet those National Housing Accord goals.

Shortly before those uninspiring building approvals figures for June were released, Dr Hunter expressed concern about the Middle East conflict pushing up construction costs.

“What we’re seeing at the moment ... is really some pretty fast pass-through into construction costs so, we’re already seeing that impact there,” she said.

The cost of building a new home soared by 5.8 per cent during the last financial year, the fastest increase in three years, as higher interest rates, new Primara Research data showed.

“The data exposes a direct conflict at the heart of current monetary policy: the primary tool available to cool construction cost inflation, raising interest rates, is the same mechanism that would reduce build activity and deepen an already critical housing shortfall,” the group’s managing director Robert Beerworth said.

The futures market regards a rate hike on August 11, that would take the cash rate to a 15-year high of 4.6 per cent, as a three-in-100 chance.

But there’s a 100 per cent chance the cost-of-living burden will still be around by year’s end, regardless of whether rates go up again or stay on hold.