With the RBA ready to raise interest rates for the third month in a row tomorrow, an economist has warned about the balancing act Australia is facing.
With the expectation that the Reserve Bank of Australia (RBA) will continue to raise the national interest rate, expert economists are worried about a recession on the horizon.
The RBA will meet on Tuesday with economists who expect the interest rate to rise for the third time in a row. The main question is whether the official cash rate will increase to 1.1 or 1.35.
“(The RBA) has indicated that there is an increase of 0.25 or 0.5 on the table; we believe they will probably go with 0.5, which will bring the cash rate to 1.35 from 0, 85, ”said Dr. Shane Oliver, chief economist at AMP. .
“The logic is simply that the economy is currently quite strong with unemployment falling and the inflation rate at 5% and still rising.”
A 0.25 increase would add just over $ 100 to the monthly repayments of a $ 800,000 mortgage. The biggest increase would add more than $ 200.
Dr Oliver said the cash rate was expected to continue an upward trend for the rest of this year, but that the rate of increase will likely be “slower” as the RBA it tries to balance the rising pressures of the cost of living.
“Thus, although we will see an increase of 0.5 percent in July, the interest rate and the inflation rate will slow down so that by the end of this year we will only see an increase in the cash rate of the 2.1 percent and finally a maximum of 2.5% by the end of the first half of next year, ”he said.
“What the RBA is trying to do now is that they are trying to signal that they are taking themselves seriously when it comes to reducing inflation and starting to cool the demands of the economy.”
As the economy continues to recover from the economic consequences of the Covid-19 pandemic, Dr. Oliver said the economic impacts of the war in Ukraine, the NSW-Queensland floods and the current energy crisis they have continued to drive up inflation rates, forcing the RBA to match upward interest rates.
“Indeed, higher interest rates have the effect of driving away purchasing power from households, which boosts demand in the economy and helps reduce inflation,” he added.
“But ultimately, the economy will slow down faster than the Reserve Bank can keep up because of all these cost-of-living pressures and vulnerability to high interest rates.”
But Dr Oliver warned that the risk of using the interest rate to combat rising inflation rates was that it could lead to a recession if the cost of living rose to a high for Australian households.
“Real wages are going down because of rising prices for things like gasoline, rent, energy, gas, grocery items, etc., that is, people are losing purchasing power and when adding this to rising interest rates, the impact on households are actually quite significant, ”he said.
“While the RBA is committed to reducing inflation, it does not want to cause a recession, because if it does, inflation will collapse and we will return to low pandemic inflation.”
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