Australia’s largest banks have cautioned the Reserve Bank that aggressive rate hikes might trigger a recession.
Since May, there have been five consecutive monthly hikes in the interest rate, bringing it to a seven-year high of 2.35 percent.
Interest rates have not risen this rapidly since 1994, which analysts Craig James and Ryan Felsman of CommSec say nearly triggered a recession.
“The economy escaped recession in 1995 as a result of the rate hikes, but it came close, with zero growth in the March quarter and 0.4% growth in the June quarter,” they stated.
Inflation was cited 41 times in the minutes of the Reserve Bank’s September meeting, which voted to raise rates by another 0.5 percentage points.
The Reserve Bank has been cautioned that its aggressive rate hikes could trigger a recession in Australia. Since May, there have been five consecutive monthly hikes in the cash rate, bringing it to a seven-year high of 2.35 percent (pictured is Governor Philip Lowe)
“In evaluating the policy decision, members observed that Australia’s inflation was at its highest level in decades and was likely to rise further in the coming months,” the document stated.
Global causes continued to account for the majority of the inflation increase.
‘However, domestic forces also played a role, with high demand, a tight labor market, and capacity limits in certain sectors of the economy exerting widespread upward pressure on pricing.’
As a result of Covid supply limits and the Russian invasion of Ukraine, which drove up crude oil prices, the Reserve Bank of Australia anticipated that inflation would reach a 32-year high of 7.75 percent in the 12 months ending in June.
Nonetheless, the RBA expects inflation to return to the upper end of its target range of two to three percent by 2024.
The minutes highlighted that wages, having increased by just 2.6% in the twelve months preceding June, were unlikely to ignite a wage-price spiral.
It stated that wage growth had stepped up from previous years’ low levels and that there were regions where labor costs were rising rapidly.
Members noted, however, that the pace of base wage rise had not yet reached levels incompatible with meeting the inflation target on a sustained basis.
Craig James and Ryan Felsman, economists at CommSec, stated that aggressive rate hikes in the mid-1990s nearly triggered a recession (pictured is an Aldi supermarket in Sydney)
The Reserve Bank only mentioned recession once, in reference to the yield curve – the difference between market returns on government bonds and target interest rates for each country.
There was no mention of Australia being on the verge of a recession, a condition that occurred in 2020 for the first time since 1991 because to the initial Covid lockdowns.
The Reserve Bank stated, “Sovereign yield curves in a number of advanced nations, notably Canada, the United Kingdom, and the United States, were flat or downward sloping, indicating market fears about the probability of recessions in these economies.”
The Commonwealth Bank, the parent business of online broker CommSec, anticipated that the RBA will increase the cash rate by 0.25 percentage points in October.
This would be followed by an additional quarter-point increase in November, bringing the cash rate to 2.85%.