Interest rate hike number 11 sparks recession worries

The decision to hike interest rates again after a month on pause has raised concerns the Reserve Bank could nudge the economy into a recession.

The central bank raised the cash rate by 25 basis points to 3.85 per cent on Tuesday, with a tight labour market and strong services inflation prodding board members in the direction of another lift.

While some economists anticipate more hikes in response to ongoing inflation pressures, others believe the central bank is at risk of doing too much.

Higher rates are already squeezing borrowers and Deloitte Access Economics head Pradeep Philip said the RBA was playing “recession roulette” by firing off another rise.

Dr Philip said hundreds of thousands of mortgage holders on low fixed rates were yet to feel the full effects of the hikes, that wages growth was still consistent with the inflation target and that inflation was clearly coming off its peak.

“With the recent independent review into the RBA reminding Australians that full employment sits alongside price stability in the bank’s mandate, it is important the RBA exercises caution on rate rises until it has seen the impact of the last 10 fully pass through the economy,” he concluded.

AMP Capital economist Shane Oliver also said the RBA had “done more than enough” and further rises would risk a recession.

He said the cash rate should be at or close to its highest point given stagnant retail sales, slowing growth, scant evidence of a wage breakout and signs of inflation passing its peak.

“Against this backdrop, ongoing rate hikes risk unnecessarily plunging the economy into a recession we don’t have to have,” Dr Oliver said.

Asked about the likelihood of a recession, Treasurer Jim Chalmers said it was inevitable the economy would slow.

“Almost everybody expects the Australian economy to slow substantially later this year, that is the inevitable consequence, in my view, of higher interest rates combined with the global slowdown,” he told reporters in Canberra.

Shadow treasurer Angus Taylor said it was clear inflation was “homegrown”.

“Core inflation in Australia is higher than many of the advanced economies around the world – higher than the entire G7,” he said in Sydney.

“We are leading the world in the worst way possible.”

Mr Taylor said the treasurer had an opportunity to rein in spending and deliver a surplus in his budget next week.

“The test for this budget will be to balance the budget, deliver simpler and lower taxes, not higher ones and embrace reforms that grow the economy and make life easier for small businesses and families.”

Poppy Johnston
(Australian Associated Press)