Australia’s peak industry group said the country was at risk of a “death spiral” of wages, inflation, and interest rates.
“We are unfortunately in a period where we are going to see increasing interest rates if we continue to see calls for wage increases that are not sustainable,” Australian Industry Group CEO Innes Willox told Sky News Australia.
While noting the upcoming minimum wage decision by the Fair Work Commission, Willox said interest rates would continue to rise if calls for unsustainable wage increases persist.
The comments come after the Reserve Bank of Australia (RBA) increased the cash rate by 50 basis points, surprising the consensus.
Australian Chamber of Commerce and Industry (ACCI) believes the move was “necessary” to tame inflation and agreed that the Fair Work Commission needed to be cautious against aggressive wage increases, which would further spur inflation.
“The RBA can only do so much. The overriding priority for the new federal government is to pull all the levers it can to address the supply side constraints that are driving up inflation and holding back the economy,” ACCI CEO Andrew McKellar said.
It is the first time the cash rate has been lifted by 50 basis points since February 2000.
The main reason for the aggressive hike was the higher-than-expected inflation, which is expected to rise further than the latest 5.1 percent figure.
RBA Governor Philip Lowe heavily implies that containing inflation is the board’s priority by stating it was committed to doing “what is necessary” to bring inflation back into the target range of two to three percent.
“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” he said in the monetary policy statement.
ANZ Bank Head of Australian Economics David Plank said the statement’s language was stronger than what was set out in May, suggesting that at least one more 50 basis point increase was on the table for the coming months.
Commonwealth Bank economists also noted there had been a “clear shift” in tone and stance from the RBA Board and now expect front-loaded hikes, starting with another 50 basis point hike in July.
David Bassanese, the chief economist at BetaShares, said the Reserve Bank’s decision had “clearly heeded the lessons of the U.S. Federal Reserve, which arguably waited too long to lift interest rates as U.S. inflation lifted last year.”
Treasurer Jim Chalmers called the announcement “very difficult news” for all Australians, particularly homeowners, already facing soaring cost of living pressures.
An average homeowner with a remaining mortgage of $330,000 (US$240,000) would see their repayments almost double, from around $87 a month to $157, according to Chalmers.
“This inflation challenge will get harder before it gets easier,” he said. “This constant living crisis has been brewing for the best part of a decade. It will take more than two and a half weeks to turn around.”
Shadow Treasurer Angus Taylor warned the government against “unnecessary” spending that would fuel inflation and higher interest rates.
“The most important thing a government can do to contain interest rates and to contain inflation is to contain its spending,” he said.
However, Nationals Senator Matt Canavan admitted there was “no doubt” the Coalition government’s spending should have been lower in its last year in office.
“The coalition government was right to spend money to help support the economy during COVID, but we needed to try and put the speed limit down over the past year now we’ve got to get on and fix it,” he told Sky News Australia.