Higher interest rates sooner may be needed to save major economic pain later, economist

Households are bracing for interest rates to hit the highest level in a decade today, but at least one economist says that still won’t be high enough to keep the economy strong.

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Households are bracing for interest rates to hit the highest level in a decade on Tuesday, but at least one economist says that still won’t be high enough to keep the economy strong.

The Reserve Bank is expected to announce at 2.30pm the official cash rate will hit a decade high of 3.6 per cent, up by .25 per cent from last month and with more flagged. Just a year ago, the rate was 0.1.

The highest inflation rate in 30 years is driving the RBA’s rate rises. Even though there are signs it has peaked at 7.8 per cent in December, that figure is well above the RBA’s target rate of between 2 and 3 per cent.

Also concerning is the sluggishness growth in the economy. National accounts figures released last week revealed the Australian economy grew just 0.5 per cent in the final three months of 2022.

The Reserve Bank of Australia has all but locked in another interest rate rise for March. Picture: NCA NewsWire Gaye Gerard

Economist Warren Hogan says if the economy is not brought under control now, a recession next year is more likely and the stress on households will be worse.

He says households are still spending too much.

“Interest rates are really far too low for the economic circumstances,” Mr Hogan an economist with Judo Bank told Sky News on Monday.

“The Australian consumer is really fighting the RBA here by dipping into their savings and not slowing their spending all that much.”

He predicted the RBA would introduce two or three more rate rises before the May budget, and they could go over 4 per cent if inflation doesn’t fall back. And may go even higher.

Treasurer Jim Chalmers believes inflation may have peaked. Picture: NCA NewsWire / Martin Ollman

Reserve Bank Governor Philip Lowe will be in the spotlight on interest rates again on Tuesday. Picture: NCA NewsWire / Gary Ramage

“The real risk here in the next two or three years is that if the economy and inflation gets away from us, that we have to raise rates by two or three percentage points more from here and of course inevitably create a severe recession. I think that is the scenario that has to be avoided,” he said.

“The question is, how much insurance would you pay now to avoid that? How much rate hikes would you do now and slow the economy now to avoid that scenario?”

The big four banks – the Commonwealth, Westpac, ANZ and NAB – have all forecast a grim year ahead.

RBA Governor Phillip Lowe has said he understands households are hurting, but if inflation is not brought under control, that pressure will be worse.

“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”

Treasurer Jim Chalmers said last week he expected inflation had peaked, and downplayed concerns interest rates could return to highs experienced in the 1990s.

“There is absolutely no chance that interest rates will get to (that) level … I want to make that clear,” he told Nine’s 60 Minutes on Sunday.

Originally published as Higher interest rates sooner may be needed to save major economic pain later, economist