RBA Interest Rates: Rates could rise by 50 basis points from 0.85% to 1.35%
While economists expect the RBA to continue raising the interest rate to fight inflation, AMP Chief Economist Dr Shane Oliver warns that the act of balance could push Australia into the next recession.
While the Reserve Bank of Australia (RBA) is expected to continue raising the national interest rate, expert economists fear a recession is looming on the horizon.
The RBA is due to meet on Tuesday with economists expecting the interest rate to be raised for the third consecutive time.
“(The RBA) has indicated that an increase of 0.25 or 0.5 is on the table – we think they will probably go with the 0.5 which will take the cash rate from 0.85 to 1, 35,” said Dr Shane Oliver, chief economist at AMP. .
“The logic is simply that the economy is currently quite strong with unemployment falling and inflation at 5% and still rising.”
Dr Oliver said the interest rate is expected to continue to rise for the rest of this year, but the rate of increase is likely to be ‘slower’ as the RBA seeks to balance rising cost of living pressures .
“So while we will see a 0.5% rise in July, the interest rate and the inflation rate will slow down so that by the end of this year, we will only see a rise in the rate cash flow of 2.1% and eventually peaking at 2.5% by the end of the first half of next year,” he said.
“What the RBA is trying to do now is they are trying to signal that they really want to bring inflation down and start cooling 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 have continued to drive up inflation rates, forcing the RBA to match rising interest rates.
“In effect, higher interest rates have the effect of depriving households of their purchasing power, which lowers demand in the economy, which helps reduce inflation,” he said. he adds.
“But ultimately the economy will slow faster than the Reserve Bank can keep up with all of these cost of living pressures and vulnerability to high interest rates.”
But Dr Oliver warned that the risk of using the interest rate to fight rising inflation rates was that it could generate a recession if the cost of living became too high for households Australians can handle it.
“Real wages go down because of the rising prices of things like petrol, rent, energy, gas, supermarket items, etc. In other words, people lose purchasing power and if you add that on top of interest rate hikes, the impact to households is actually quite significant,” he said.
“While the RBA is committed to bringing inflation down, it does not want to cause a recession – because if it does, inflation will crash and we will return to pandemic-level low inflation.”