Leading economists are predicting that Australia may tip into a recession if the Reserve Bank raises interest rates one more time.
The central bank has lifted the cash rate 12 times since May 2022 to an 11-year high of 4.1 per cent – marking the most aggressive pace of monetary policy tightening since 1989.
The futures market regards a Tuesday rate hike as an eight per cent chance.
However, the banks and economists are predicting another hike sometime before the end of the year in a bid to tame inflation.
While it fell to six per cent in June, the consumer price index still remains well above the Reserve of Australia’s two to three per cent target.
Experts like AMP chief economist Shane Oliver have warned another rate increase could be a tipping point.
Leading economists are predicting that Australia will fall into a recession if the Reserve Bank decides to hike interest rates again
‘We are now at a 50 per cent chance of tipping into a recession,’ Dr Oliver told Daily Mail Australia.
‘We’re not at that point yet though, it’s always possible the Reserve Bank holds the rate.’
‘But the more rate rises, the higher the chance of a recession.’
Dr Oliver said high household debt levels, as a result of unaffordable housing, increased the risk of recession, as higher monthly mortgage repayments depleted savings.
He described the prediction of Australia heading into a recession as a ‘close call’.
Reserve Bank Governor Philip Lowe has argued interest rates rises were an easier way to tackle high inflation because governments were reluctant to raise taxes.
Dr Oliver said this meant the Reserve Bank instead of politicians would wear the unpopular decisions.
‘There’s an argument the government could intervene,’ he said.
‘There’s various things the government could do but they’re unpopular, so it falls on the Reserve Bank.’
HSBC Australia chief economist Paul Bloxham said it was almost guaranteed the central bank will hike rates again because inflation was still too high.
‘On balance, we see the RBA as near the end of its hiking phase, but likely to deliver one more hike which we expect in August,’ he told the Sydney Morning Herald.
The central bank has lifted the cash rate 12 times since May 2022, which is the most aggressive pace of rapid rate increases since 1989 (stock image)
AMP chief economist Shane Oliver (pictured) described the prediction of Australia tipping into a recession as a ‘close call’
Independent economist Saul Eslake was less inclined to believe a recession was likely, arguing demand in the economy was still strong in some areas.
‘It’s possible, you can’t rule it out,’ he told Daily Mail Australia. ‘I’d still say it’s a relatively low possibility though.’
Mr Eslake pointed towards factors such as population growth, economic comparisons to other countries like the US – which has a higher cash rate, but is not in a recession – as reasons why a recession may not eventuate.
He also referred to consumer confidence turning around, the property market bouncing back and retail sales falling.
‘We’re not at that point yet. It’s always possible the Reserve Bank holds rates,’ he said.
‘At this stage knowing what we know, I don’t think it’s (a recession) likely.’
A recession in 2023 or 2024 would be the first in Australia sparked by higher interest rates since 1991, after rates hit 18 per cent in late 1989.
Of the four major banks, the Commonwealth Bank, Westpac and NAB are predicting another rate rise on Tuesday, while ANZ is not.
The Commonwealth Bank and Westpac are both forecasting a 0.25 percentage point increase on August 1 that would take the cash rate to 4.35 per cent.
Should their predictions come true, this would be the Reserve Bank of Australia’s 13th rate rise in 15 months.
Tuesday’s Reserve Bank board meeting will be governor Philip Lowe’s second last before his term ends on September 17
A borrower with an average $600,000 would see their monthly repayments surge by another $99 – or by an annual pace of $18,744 in just 15 months.
It means repayments would have soared by 67.7 per cent in 13 months with borrowers paying $1,562 more than they did little more than a year ago.
Annual repayments would also be $18,744 higher than the start of 2022.
The predictions from the Commonwealth Bank and Westpac are being made despite inflation in June falling to 6 per cent, down from an annual pace of 7 per cent in the March quarter and a 32-year high of 7.8 per cent at the end of 2022.
The Reserve Bank sees unemployment, now at a 48-year low of 3.5 per cent, climbing to 4.5 per cent by the end of next year – a level regarded as the non-accelerating inflationary rate of unemployment.
Tuesday’s Reserve Bank board meeting will be Dr Lowe’s second last before his seven-year term ends on September 17.
