Interest rate hikes slow as threat of global recession looms

The Reserve Bank has slowed its aggressive interest rate hiking program until at least Christmas as it waits to see how households cope with higher mortgage payments while monitoring the looming threat of a global recession.

The bank’s board increased the official cash rate by a quarter of a percentage point at its monthly meeting on Tuesday, taking it to a 9-year high of 2.6 per cent. It was the sixth consecutive increase in the cash rate, which has now been lifted by 2.5 percentage points since May.

On a $750,000 mortgage, the quarter percentage point increase will lift monthly repayments by $110, the cumulative hikes since May adding more than $1000 to each mortgage repayment.

Reserve Bank governor Philip Lowe emphasised Tuesday’s hike was unlikely to be the last.

“The board expects to increase interest rates further over the period ahead,” he said in a statement. “It is closely monitoring the global economy, household spending and wage and price-setting behaviour.”

The quarter percentage point rise came as a surprise to financial markets - which expects the cash rate to reach 4.1 per cent by the middle of next year - and was questioned by some economists, who argue that the bank could be forced to chase higher rate rises later.

The Reserve Bank has been lifting rates to dampen inflation, which is expected to reach about 7.75 per cent by year’s end and then a little over 4 per cent through next year.

Lowe said getting inflation back to the bank’s 2 to 3 per cent target range was still the key objective, but two major sources of economic uncertainty - how households cope, and a “deteriorating” global economic outlook - could challenge that achievement.

Treasurer Jim Chalmers said Australia will not be immune to a potential global recession.

“The weight of opinion around the world is that the global situation has gotten much worse, even in the last few weeks,” he said.

The Treasurer pointed to the fact that the OECD, the International Monetary Fund and the World Bank have not ruled out a global recession.

“That obviously has implications for us. We wouldn’t be spared completely from a downturn in the US or in the global economy for obvious reasons,” he said.

The Treasurer’s comments came after the United Nations Conference on Trade and Development used its annual report to warn of the growing risk of a global recession caused by the increase in interest rates by central banks around the world.

“We have the tools to calm inflation and support all vulnerable groups. This is a matter of policy choices and political will,” the UN conference’s secretary-general Rebeca Grynspan said. “But the current course of action is hurting the most vulnerable, especially in developing countries, and risks tipping the world into a global recession.”

Treasurer Jim Chalmers said the global economic forecast is gloomy.Credit: Alex Ellinghausen

Shadow Treasurer Angus Taylor said higher interest rates would add pressure to mortgage holders who are also facing high inflation. He said the government should produce a “sensible budget” in three weeks’ time to help.

“While the Reserve Bank of Australia makes its decisions independently, the government can and should use its fiscal levers to reduce pressure on households,” he said.

Major banks moved quickly following the Reserve Bank’s announcement, with NAB and Westpac passing on the rate hike to mortgage customers in full within on Tuesday afternoon followed later by ANZ and Macquarie Bank.

Chalmers said rising interest rates, combined with high and rising inflation and a gloomy global economic outlook would affect the government’s first budget later this month.

“This will be a budget which is about difficult decisions in difficult times,” he said.

Deutsche Bank’s chief economist for Australia, Phil O’Donaghoe, said the Reserve Bank’s comparatively small hike was the wrong move as local inflation and wage pressures are similar to other wealthy nations.

“Rather than signalling ‘almost done’, we think the risk behind today’s decision is that it eventually looks more like a detrimental delay, forcing the RBA to ‘chase’ higher than expected inflation and wage prints though a prolonged hiking cycle that stretches into 2023,” he said.

Callam Pickering, Asia-Pacific economist for online job site Indeed, said Australia’s economic resilience could force the Reserve Bank to “do more to combat inflation”.

“To bring inflation back towards the 2-3 per cent target requires the demand for goods and services to soften. There are few signs, outside of the property sector, that demand has meaningfully changed,” he said.

But CommSec chief economist Craig James said the bank needed to tread carefully from here.

“The Reserve Bank has also achieved a major milestone in getting the job market to full employment,” he said. “And it doesn’t want to risk that tremendous achievement by pushing the economy into recession.”

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