Reserve Bank flags higher rates to tackle inflation

In announcing the rise, the RBA board said it expected more increases in interest rates would be needed in coming months to return inflation to its target.

Inflation is sitting at 7.8 per cent - its highest level since 1990 - and the central bank is aiming to get it back within its target band of two to three per cent.

The central bank board said in its latest statement on monetary policy released on Friday it was mindful of the already-considerable adjustment to interest rates.

"Some households have substantial savings buffers or are benefiting from the tight labour market and faster wages growth," it said.

"Others, though, are experiencing a painful squeeze on their budgets due to higher interest rates and the rising cost of living.

"In addition, some households may moderate their spending in response to the decline in housing prices.

"In light of these competing forces, the board is closely monitoring household spending and saving behaviour, and their contribution to domestic demand pressures."

The board said high inflation made life difficult for people and damaged the functioning of the economy.

"And if high inflation were to become entrenched in people's  expectations, it would be very costly to reduce later.

"The board expects that further increases in interest rates will be needed to ensure that the current period of high inflation is only temporary.

"In assessing how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.

"It remains resolute in its determination to return inflation to target and will do what is necessary to achieve this."

The RBA expects aggregate wages growth to pick up further over 2023, with growth in the wage price index forecast to peak about 4.25 per cent late in the year.

The unemployment rate is expected to start picking up from around the middle of 2023, reaching 4.5 per cent by mid-2025.

The outlook is for slower GDP growth this year and next, about 1.5 per cent.

It noted forecasts for overall GDP growth in Australia's major trading partners in 2023 and 2024 are unchanged compared with three months ago, about 3.5 per cent.