A chilling warning that the Reserve Bank now risks tipping Australia into a recession – but that won’t save borrowers from ANOTHER rate hike next month
- CommSec has warned that aggressive rate hikes could trigger a recession in Australia
- The five consecutive months of increases were the most severe since 1994
- The minutes of the Reserve Bank’s September meeting mention the word “inflation” 41 times
One of Australia’s ‘big four banks’ has warned that continued aggressive rate hikes could tip Australia into a recession.
Borrowers have suffered five consecutive monthly interest rate increases from the Reserve Bank of Australia since May, taking the cash rate to a seven-year high of 2.35%.
Interest rates haven’t risen this fast since 1994, which CommSec economists Craig James and Ryan Felsman say nearly triggered a recession.
“The economy avoided recession in 1995 after rate hikes, but came close, with zero growth in the March quarter, followed by growth of just 0.4% in the quarter. of June,” they said.
The minutes of the Reserve Bank’s September meeting – which voted to raise rates an additional 0.5 percentage points – mentioned the word inflation 41 times.
The Reserve Bank is warned that its aggressive rate hikes could tip Australia into a recession. Since May, borrowers have suffered five consecutive monthly increases in the cash rate, taking it to a seven-year high of 2.35% (pictured is Governor Philip Lowe)
“In reviewing the policy decision, members noted that inflation in Australia was at its highest level in several decades and is expected to rise further in the coming months,” he said.
“Global factors continued to explain much of the rise in inflation.
“However, domestic factors were also playing a role, with widespread upward pressure on prices due to strong demand, a tight labor market and capacity constraints in some sectors of the economy.”
Inflation for the year to June jumped 6.1% and the Reserve Bank of Australia expected it to hit a 32-year high of 7.75% due to Covid supply constraints and the Russian invasion of Ukraine driving up crude oil prices.
However, the RBA still expected inflation to return to the upper end of its target of 2-3% by 2024.
The minutes noted that wages – which rose just 2.6% in the year to June – were unlikely to trigger a wage-price spiral.
“Wage growth had recovered from the low rates of previous years and there were some pockets where labor costs were rising rapidly,” he said.
“However, members noted that the rate of base wage growth has so far not reached levels that would be inconsistent with achieving the inflation target on a sustainable basis.”
CommSec economists Craig James and Ryan Felsman said aggressive rate hikes in the mid-1990s nearly triggered a recession (pictured is an Aldi supermarket in Sydney)
The Reserve Bank has only used the word “recession” once, and that was in reference to the yield curve – the spread between market yields on government bonds and interest rates. interest targets in each country.
No mention was made of Australia being close to recession, a situation which last occurred in 2020 for the first time since 1991 following the early Covid lockdowns.
“Sovereign yield curves in a number of advanced economies – including Canada, the UK and the US – were flat or downward sloping, indicating market concerns about the possibility of recessions in these economies. “said the Reserve Bank.
Commonwealth Bank – the parent company of online brokerage CommSec – expected the RBA to hike the spot rate by 0.25 percentage points in October.
This would be followed by another quarter of a percentage point in November, taking the spot rate to 2.85%.