RBA governor Philip Lowe is “deadly serious” about bringing inflation down and says even higher interest rates may be needed to achieve it.

Speaking in Perth on Tuesday night, Dr Lowe said that while headline inflation is falling, the battle to ensure that continues is not over.

“The peak in inflation in Australia is now behind us,” Dr Lowe said.

“But that has not changed our view that it will be some time before inflation is back in the target range.”

Surprising markets on Tuesday, the RBA hiked interest rates to a decade-high 3.85 per cent, adding another $78 to monthly repayments  on a $500,000, 25-year loan – on top of more than $1000 since last May.

‘Reasonable time frame’ for inflation cooling

But while conceding that such hikes are “squeezing” family budgets, Dr Lowe said even higher mortgage bills may be needed to bring inflation back to the RBA’s 2-3 per cent target band in a “reasonable time frame”.

Based on current forecasts that will be mid-2025, which is longer than other nations in an effort to preserve recent jobs growth, Dr Lowe said.

“We can only do this if people believe that inflation is going to come down, and that partly underpins our decision today,” he said.

“The rate rise today … is because we want to bring inflation down. We’re deadly serious about it and we will do what’s necessary.”

‘Uncomfortably persistent’ inflation

Dr Lowe said Tuesday’s rate hike was partly sparked by concerns that  “uncomfortably persistent” inflation for key services, including electricity and gas, will make the central bank’s job more difficult during 2023.

“Over the past month we saw further evidence of the strength of the labour market, the persistence of global inflation, and the persistence of services price inflation here,” he said.

“We came to a strong consensus it was time to move again today.”

Treasurer Jim Chalmers said Tuesday’s rise was “a pretty stark, pretty brutal reminder of the difficult economic conditions”.

“I think people are broadly aware that we‘ve got an inflation challenge in our economy, people feel it every day,” he said.

Economists are predicting further interest rate increases are in the pipeline after the RBA’s decision to end its mortgage reprieve in May.

BIS Oxford Economics head of macroeconomic forecasting Sean Langcake fears that rising services prices will derail the RBA’s plans to get a lid on inflation and will see the cash rate rise further to 4.1 per cent.

“We’re not out of the woods here,” Mr Langcake said.

“The services inflation story is really nasty and the labour market is still very strong.

“It’s still a pretty ugly outlook when it comes to inflation … the RBA has left the door open to more hikes from here – I wouldn’t rule it out.”

Indeed APAC economist Callam Pickering said the RBA won’t hesitate to lift rates again if it feels as though more work is needed to push down services inflation.

“There’s evidence that inflation is beginning to moderate. The problem is it’s not moderating in the areas the RBA wants to see,” he said.

“The moderation we’ve seen has typically been in prices of tradeable goods, driven by overseas factors, but what the RBA ultimately wants to see is domestically-driven price pressures [for services] come off.

“What they’re saying at the moment is they don’t think that’s possible based on the composition of inflation they’re seeing.”