The bank will on Friday release its latest forecasts for the economy.

Lowe revealed the RBA believes inflation will reach 7.75 per cent by year’s end, remaining above 4 per cent through 2023 and then “around 3 per cent” across 2024.

The economy is expected to grow by 3.25 per cent this year but then step down to 1.75 per cent in the next two years.

The governor admitted the bank faced a fine line of hitting its inflation target while keeping the economy expanding.

“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,” he said.

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“The outlook for global economic growth has been downgraded due to pressures on real incomes from higher inflation, the tightening of monetary policy in most countries, Russia’s invasion of Ukraine and the COVID containment measures in China.

“There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy. The floods this year are also affecting some prices.”

Unemployment was likely to remain low, inching up to about 4 per cent in 2024.

Lowe said consumers’ reaction to recent rate rises would be critical in how the bank tightened monetary policy in coming months.

“A key source of uncertainty continues to be the behaviour of household spending,” he said.

‘It’s not a shock to anybody but it will sting.’

Treasurer Jim Chalmers

“Higher inflation and higher interest rates are putting pressure on household budgets. Consumer confidence has also fallen and housing prices are declining in some markets after the large increases in recent years.

“Working in the other direction, people are finding jobs and obtaining more hours of work. Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic.

“The board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.”

ABS data suggest rate rises are already having an impact on activity in the property market, and indications they are starting to be felt more broadly, with ANZ data showing job ads fell 1.1 per cent last month.

Loans for owner-occupiers fell by 3.3 per cent in June to be 9.6 per cent lower than a year ago. Loans to investors dropped by 6.3 per cent in June but are still up 17.3 per cent on the same time in 2021.

Economists from investment group Jarden expect home prices to fall by 15 to 20 per cent by the end of 2023, and predict steeper falls in Sydney and Melbourne because of affordability constraints.

Recent data from CoreLogic showed national home values have fallen 2 per cent from their April peak, after rising 28.6 per cent during the first two years of the coronavirus pandemic.

At the same time, consumer confidence has continued to rise, going up for the third week in a row despite higher inflation.

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But ANZ head of Australian economics David Plank said sentiment remained very low and was vulnerable to more hikes from the RBA.

“The sharp fall in petrol prices over the past three weeks may have been more important for sentiment,” he said.

Before the RBA decision, Chalmers said the government had to make the RBA’s job “as easy as possible” when it came to taking heat out of the economy and bringing inflation down.

“That means not splashing cash around unnecessarily,” he said. “It means dealing with the supply-side issues in the economy where we can so that we make the job of the Reserve Bank easier, not harder.”

The Asia-Pacific economist for jobs website Indeed, Callam Pickering, said the rates would continue to rise.

“With inflation at a two-decade high, the RBA had little choice but to pull the trigger again in August,” he said.

“And they’ll continue to do so until inflation is under control or genuine cracks begin to appear across the Australian economy. Households and businesses should prepare for rates of around 3 per cent by year end.”

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