Economists say a recession is still possible as global conditions remain volatile and Australian households and businesses feel the pain of higher interest rates.
The Reserve Bank on Tuesday lifted the cash rate 25 basis points to 3.35 per cent, the highest level since September 2012 and the ninth rise in a row.
It also warned further rate rises would be needed over the months ahead to ensure inflation dropped from its existing 7.8 per cent to the central bank’s target band of two to three per cent.
“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,” the RBA said in a statement.
RateCity says the rise will mean an extra $908 a month in repayments since the RBA’s rate hikes began in May for the average borrower with a $500,000 loan.
KPMG chief economist Brendan Rynne said there was a risk the economy would be pushed into a downturn, especially if wage growth was excessive and flowed through to prices.
He said with Australia’s heavy dependence on trade, any global slowdown was likely to cause a compounding negative effect on the local economy.
Dr Rynne noted the RBA was not wholly discounting the risk of a recession as international and domestic demand slowed from tighter monetary conditions around the world.
Macquarie Business School’s Geoffrey Harold Kingston, part of Finder’s RBA cash rate survey, said two further 25-basis point rises could be expected by mid-year.
“Then it will look like the budget has been too expansionary and wage inflation is too high (and) late in the year there will be recession fears,” he said.
Unemployment is expected to increase to 3.75 per cent by the end of the year and 4.5 per cent by mid-2025, the RBA said.
ACTU president Michele O’Neil said the ninth consecutive rate rise would deepen cost-of-living pain for many workers and risked pushing the economy “off a cliff”.
While Treasurer Jim Chalmers said the RBA board was making independent decisions to tackle inflation, cabinet colleague Bill Shorten said he hoped the board would be mindful of the effect of rate rises.
“You don’t want to cause bigger problems to Australians who are paying mortgages when the inflation problem is beginning to recede anyway,” he said.
CPI inflation is expected to fall to 4.75 per cent this year and to about three per cent by mid-2025.
Welfare groups are concerned the higher rates will be passed on to renters already struggling to cover their costs.
© AAP 2023
