Interest rates threat has Labor on edge

Labor has signalled its growing concerns with the Reserve Bank’s plan to raise interest rates for months to come, with Anthony Albanese saying he is hopeful ­inflation has peaked.

Treasurer Jim Chalmers during question time at Parliament House on Wednesday. Picture: Getty Images

Labor has signalled its growing concerns with the Reserve Bank’s plan to raise interest rates for months to come, with Anthony Albanese saying he is hopeful ­inflation has peaked.

Assistant Treasurer Stephen Jones diverged from Reserve Bank governor Philip Lowe on Wednesday and distanced the federal government from the need for two more rate hikes, declaring that he was “hoping that, if this is not the last (hike), it’s near the last of the rate increases”.

The Prime Minister warned in Canberra that the nation was not immune from global fears of a recession, but that inflation looked to be on a “downward trend”.

“I am very hopeful, backed up by the comments itself of the Reserve Bank and others, that inflation has peaked and that what we will see from here is a downward trend,” Mr Albanese said.

It came as Jim Chalmers moved to reassure the nation that further rate rises over coming months will not tip the country into recession, as economists said a shallow downturn might be required to bring inflation back under control.

The Treasurer said he sympathised with the struggle of many indebted households facing higher interest bills, but would not be drawn into directly criticising the independent Reserve Bank.

“They (the central bank) have an important job to do … to try and get on top of this inflation challenge without crashing the economy,” Dr Chalmers said.

He said Treasury forecasters “don’t expect at this point a recession here in Australia”, and that officials had factored Tuesday’s rate hike into their October budget estimates. The budget papers, however, assumed the cash rate would peak at 3.35 per cent in the first half of this year.

Dr Chalmers said there were “signs that inflation has begun to moderate in our economy”.

“Obviously, a lot of people are focused on the language in the Reserve Bank board’s statement yesterday. That happens after every rate decision,” he said.

“I accept that the board’s language yesterday was pretty straightforward” that there would be more than one more rate rise.

On Wednesday, analysts lifted their predictions for a further two rate rises, and warned that the central bank could go further still.

ANZ senior economist Felicity Emmett said: “Our central case is still that 3.85 per cent is the peak. But when you think about the balance of risks there’s now a much greater chance we end above 4 per cent.” She predicted consumer price growth would ease, but “there’s not really a lot of evidence of moderating underlying inflation”.

“The higher the cash rate goes, the higher the chance we do have some sort of recession. That might be quite a shallow recession, but we do have very strong inflation momentum at present, and it might require a quarter or two of negative GDP growth to bring things back into balance.”

NAB chief economist Alan Oster said Dr Lowe had become too hawkish, given the impact of monetary policy, especially in the context of 800,000 households who would roll off fixed rates of 2 per cent to variable rates of 6 per cent. “I’ll make the obvious comment that monetary policy operates with a 12-18 month lag, and we only started in May. I would be worried … in the back half of the year,” he said. “I agree with their approach in December (when the central bank was signalling the prospect for a ‘pause’ in rate rises). I don’t agree with what they are doing now.”

KPMG chief economist Brendan Rynne said the RBA had last year estimated a “neutral” cash rate of 2.5 per cent, and the prospect of rates reaching 3.85 per cent implied monetary policy would be in an “extremely contractionary position”.

Dr Rynne said the government was in a “difficult position”, but that it was doing the right thing by showing budget restraint.

“It would be a politically easy decision to throw money at households to help relieve the cost-of-living pressures,” he said. “But they also recognise that that will only drag the pain out for longer, because it will underpin higher levels of inflation and make the RBA’s job harder. History teaches us that when monetary policy and fiscal policy act in unison, as opposed to working against each other, you’re able to reach better economic outcomes in a more timely manner.”