SYDNEY, (Reuters) – Australia’s central banks has drastically revamped its inflation forecasts on Friday. This foreshadows how high interest rates will have to go to end the nation’s living costs crisis.

Reserve Bank of Australia’s quarterly statement on Monetary Policy warned that core inflation may now reach 4.6% in December. That is two percentage point higher than their February prediction.

This would put it well beyond the RBA’s target range of 2-3%. Inflation was not seen to return to its peak until mid-2024. It suggests that a long tightening cycle is in the offing.

The unemployment rate is now at its lowest point in 50 years, 3.6%. It will then drop to a new low of 3.6% for the year ahead. Finally wages will rise after many years of mediocre gains.

From the 2.3% current rate, the annual wage growth should accelerate to 3.0% at the end of the year and 3.7% in mid-2024.

This powerful combination led to the RBA Board raising interest rates by 25 basis point to 0.35%. It is the first rise in over a decade and indicating that there will be many more.

Philip Lowe, RBA Governor wrote that the Board was committed to doing all it takes to see inflation return to Australia’s target in the 68-page document. This will mean that interest rates must be increased over the coming months.

According to the markets, another rate hike is expected to occur to at most 0.60% by June. Then, a move every month will be required to increase to 2.75% before Christmas. RBA estimates base their forecasts on rates around 1.75% at year’s end, and an increase of 2.5% to the end of 2023.

Lowe suggested 2.5% for a neutral rate, however, he was not specific on when or how quickly they would get there.

ALONE

This is not a problem that the RBA faces alone. The Federal Reserve increased its rate by half a percentage point last week, and made similar moves in June as well. Although the Bank of England hiked Thursday, it was significantly less optimistic about the economy’s future.

As Prime Minister Scott Morrison fights an election campaign that is centered squarely around economic management, the sudden increase in Australian borrowing prices has not been good news.

The news was bad for Australian families, who now have A$2 trillion in mortgage debt. This is despite one of the largest housing bubbles in Australia’s history.

RBA believes consumers will be able to weather the storms thanks, in part, to A$272 trillion more savings that households have accumulated since the pandemic.

Forecasts by the central bank showed that the economy would expand at a healthy 4.2% next year. However, it will slow to 2.0% in 2023 because of rising rates and higher inflation. Moderation in home prices also play a role.

However, there were many unknowns. These included new coronavirus strains, conflict in Ukraine and global supply issues. Also, how households will react to higher inflation.