Reserve Bank ‘risks tipping Australia into a recession’ with its aggressive rate hikes

One of Australia’s ‘Big Four’ banks has warned that continued aggressive rate hikes could tip Australia into a recession.

Borrowers endured five consecutive monthly interest rate increases from the Reserve Bank of Australia since May, taking it to a seven-year high of 2.35 per cent.

Interest rates have not escalated this quickly since 1994, which CommSec economists Craig James and Ryan Felsman said almost sparked a recession. 

‘The economy avoided recession in 1995 after the rate hikes, but it went close, with zero growth in the March quarter, followed by growth of just 0.4 per cent in the June quarter,’ they said.

Minutes of the Reserve Bank’s September meeting – which voted to hike rates by another 0.5 percentage points – mentioned the word inflation 41 times.

‘In considering the policy decision, members noted that inflation in Australia was at its highest level in several decades and was expected to increase further over the months ahead,’ it said.

‘Global factors continued to explain much of the increase in inflation. 

‘However, domestic factors were also playing a role, with widespread upward pressure on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy.’

Inflation in the year to June surged by 6.1 per cent and the Reserve Bank of Australia expected it to hit a 32-year high of 7.75 per cent as a result of Covid supply constraints and the Russian invasion of Ukraine pushing up crude oil prices.

However, the RBA still expected inflation to return to the higher end of its two to three per cent target by 2024.

The minutes noted wages – which grew by just 2.6 per cent in the year to June – would be unlikely to spark a wage-price spiral.

‘Wages growth had picked up from the low rates of prior years and there were some pockets where labour costs were increasing briskly,’ it said.

‘However, members noted that the rate of base wages growth so far had not reached levels that would be inconsistent with achieving the inflation target on a sustained basis.’

CommSec economists Craig James and Ryan Felsman said aggressive rate hikes in the mid-1990s almost sparked a recession (pictured is an Aldi supermarket in Sydney)

The Reserve Bank only used the word ‘recession’ once, and that was in reference to the yield curve – the gap between market returns on government bonds and target interest rates in each country.

No mention was made of Australia being close to recession, a situation that last occurred in 2020 for the first time since 1991 as a result of the first Covid lockdowns. 

‘Sovereign yield curves in a number of advanced economies – including Canada, the UK and the US – were flat or downward sloping, indicating market concerns about the possibility of recessions in these economies,’ the Reserve Bank said.

The Commonwealth Bank – online broker CommSec’s parent company – expected the RBA to raise the cash rate by 0.25 percentage points in October.

This would be followed by another quarter of a percentage point in November, taking the cash rate to 2.85 per cent.