Luke Yeaman, chief economist at the Commonwealth Bank, said the Reserve Bank of Australia was running a serious risk of triggering a recession if it raised interest rates again. The official cash rate currently stands at a 15-year high of 4.6 per cent after four rate increases this year, and markets assign a one-in-five chance of a further rise in November.
“With households already under pressure and a depressed housing market, any further rate hikes risk tipping the economy over the edge,” Yeaman said. “This argues for a conservative approach to policy, with the RBA staying in ‘fine-tuning’ mode to avoid crashing the economy. At most, they may have to hike one more time to bring inflation back to target in a reasonable time frame.”
The warning comes as high oil prices complicate the RBA’s task of bringing inflation down. Brent crude briefly touched almost $US110 a barrel at the weekend, its highest level since May. Westpac’s head of business and industry economics, Sian Fenner, said Brent was now likely to average $US101 in the final three months of the year before easing to $US77 a barrel by late 2027. She warned that if the conflict in Iran escalated, oil could surge to $US150 a barrel, leaving Australian inflation above 4.5 per cent for most of 2027.
“The RBA faces a difficult trade-off between much higher inflation and a significant hit to activity, as households cut discretionary spending and businesses defer investment,” Fenner said.
Reserve Bank assistant governor Chris Kent, speaking at a Commonwealth Bank function in Sydney, acknowledged that high oil prices continued to be a major factor in global and domestic inflation. Noting that the full impact of past interest rate increases had yet to flow through the economy, Kent said the monetary policy committee was constantly asking whether its stance was “restrictive enough”. He pointed to signs of slackening in the labour market and easing household spending.
Kent also addressed the government’s changes to negative gearing and capital gains tax, which many analysts believe have contributed to falling property values this year. The policies appeared to have reduced investor activity, he said, adding, “I think it’s in a helpful direction, I think that’s hard to argue with.”
Treasurer Jim Chalmers has promised spending cuts in the mid-year budget update expected in December and has played down the prospect of further cost-of-living relief. Yeaman cautioned that delivering a contractionary budget to support the RBA would be difficult given increasing stress on household budgets and ongoing structural budget pressures.