Warning to Reserve Bank over interest rate hike

The Reserve Bank is widely expected to hike interest rates on Tuesday, but one economist is warning the central bank against going too far.

Australia could soon be plunged towards an unnecessary recession if the Reserve Bank does not ease up on future interest rate rises.

The central bank is widely expected to deliver a fifth consecutive rate hike of 50 basis points when the board meets on Tuesday, bringing the cash rate up to 2.85 per cent.

But it has been warned that if it continues to aggressively raise rates past 4 per cent, a recession will follow.

“If we head up to those sorts of levels then I think we will go into recession and the risks of that are rising,” AMP chief economist Shane Oliver told Sky News.

Economists are mixed on what they expect rates to rise to but agree the RBA is expected to hike rates by 50 basis points on Tuesday.

Economists at three of the four big banks expect the RBA to raise the cash rate by 50 basis points on Tuesday.

After six months of rate rises, CBA chief economist Craig James suggested the board should consider a 0.25 per cent rise.

“These rate hikes are biting. We are closer to where we need to be in terms of a peak of interest rates,” he said.

Central banks across the world have looked to interest rates in an attempt to rein in rampant inflation, which has hit 6.8 per cent domestically in the 12 months to August.

Treasurer Jim Chalmers said the situation globally was “dangerous and difficult,” warning Australia may not be spared from a global economic downturn.

Jim Chalmers says the global environment is ‘dangerous’. Picture: NCA NewsWire / Gary Ramage

“Inflation numbers with a six in front of them or even a seven are incredibly concerning,” Mr Chalmers said on Sunday.

“The global situation has deteriorated dramatically in many of the major economies that we monitor most closely. The chance of a recession has edged over from possible to probable.”

Asked about the risk on Monday, NSW Treasurer Matt Kean agreed there were “real life threats” in the global economy but said the state, and the nation, were well-placed to “weather the storm”.

“The fundamentals of the NSW economy remain strong, business confidence remains strong, and consumer confidence is inching back,” he said.

“Obviously, what’s happening overseas … will have an impact on the Australian economy, there’s no doubt about that, but we are as well placed as anywhere in the world to weather the storm.”