Deutsche Bank warns Reserve Bank will need to go harder as Aussies worry inflation won’t fall

Australians are worried inflation won’t swiftly return to the Reserve Bank’s target range, adding to the case to keep interest rates higher for longer.

The RBA has been fighting to get price rises back into its 2 to 3 per cent band since a stimulus-fuelled explosion in 2021 started to shred wages as the cost of living soared.

But Deutsche Bank has warned households are starting to lose trust that the target will be achieved any time soon.

Only 15 per cent of respondents to a regular Melbourne Institute survey believe inflation will hit the band in the year ahead — though the numbers have been slowly improving since the post-COVID price spike.

“(Trust) in the RBA’s inflation target has never been this low for this long,” the report, authored by Deutsche Bank economist Phil Odonaghoe, said.

“Not only that, the longest prior stretch was about half as long as the current episode.”

The RBA reckons inflation will be back under 3 per cent at the end of 2025.

The target has been crucial to keeping inflation low since its introduction in the early 1990s.

When workers and businesses start to expect higher inflation, they ask for higher prices in wage deals and contracts — pushing up costs and potentially sparking a vicious cycle.

The news will be a worry for the central bank, which has consistently warned that higher expected inflation will mean interest rates need to go up and stay up to slow rising prices.

Deutsche Bank already believes the RBA will lift the nation’s benchmark borrowing rate by 25 points in August as inflation runs above market forecasts.

The latest data on expected inflation would “only add to the case for tighter policy”, the bank said.

“(The) Bank has repeatedly made clear it is alert to the risk that inflation expectations could decouple from the inflation target,” the report said.

But late on Monday, markets were 75 per cent confident rates would not change at the upcoming meeting.