RBA Hints at Pause to Interest Rate Hikes Amid Concerns About Recession

Pedestrians walk past the Reserve Bank of Australia (RBA) head office in Sydney, Australia, on Nov. 1, 2022. (AAP Image/Bianca De Marchi)

The Reserve Bank of Australia (RBA) has announced a 10^th consecutive interest rate hike, taking the official cash rate to the highest level in 11 years.

However, there are signs that the current monetary tightening cycle may end soon as the risk of a recession emerges.

On March 7, the RBA board decided to lift the official cash rate by another 0.25 percent to 3.6 percent in an effort to bring down inflation.

While the board said domestic inflation could have peaked, it noted that services inflation still remained high and housing rent was growing at the fastest rate in some years.

The board members were also concerned about the risk of a wage-price spiral due to a tight labour market and the uncertainty around the timing and extent of the slowdown in household spending.

Under such conditions, the RBA expected the interest rate hiking cycle to continue.

However, RBA governor Philip Lowe softened his language on future interest rate increases compared to the hawkish tone in the February board meeting.

“The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said.

Governor of the Reserve Bank of Australia Philip Lowe makes a speech in Sydney, Australia, on March 19, 2020. (Brendon Thorne/Getty Images)

City Index senior market analyst Matt Simpson said the change in the language could hint that the monetary tightening cycle was approaching the end.

“Of course, a final 25 (basis point) hike is far from certain at this point, but the main takeaway for me is that the RBA has removed a key hawkish sentence from the February statement,” he said in comments obtained by AAP.

While there is hope that an end to interest rate hikes is in sight, mortgage holders will continue to bear the brunt of elevated borrowing costs in the meantime.

According to the financial comparison website RateCity, the latest interest rate increase will add $77 (US$50.7) to the monthly repayment of a typical owner-occupier with a $500,000 mortgage on a 25-year term.

The figure will go up to $116 and $154 for loan sizes of $750,000 and $1 million, respectively.

Concerns Grow Recession On the Horizon

While there is a consensus about the need to bring down inflation, some economists have raised concerns that the RBA risks plunging the economy into a recession.

Deloitte Access Economics head Pradeep Philip said supply-side factors were mainly behind Australia’s high inflation.

He urged the federal government to take a greater role in the fight against inflation with fiscal policy, saying the RBA only had one tool at its disposal, namely raising interest rates.

“In the meantime, the RBA should pause rate hikes, or it will overshoot and cripple the economy,” Philip said.

Dr Gonzalo Castex, a senior lecturer at the economics school of the University of New South Wales, said Australia could potentially fall into a recession if the central bank continued to lift interest rates.

“If the cash rate increases, it makes investment more expensive and imposes financial hardship on firms and households,” he told The Epoch Times.

“As a result, the economy may slow down up to a point where we could fall into a recession.”

Meanwhile, the Centre for Independent Studies chief economist Peter Tulip told The Epoch Times that while the chance of Australia falling into recession was low, the RBA would likely stop tightening and start reducing interest rates if the worst-case scenario occurred.

Warning Signs from Australia’s Largest Firms

The latest interest rate hike comes as many top Australian companies reported sluggish growth in the latter half of 2022.

According to data from Bloomberg, around 41 percent of the 158 companies on the benchmark S&P/ASX 200 Index posted negative earnings surprises in the first half of the 2022-2023 financial year, up from 28 percent a year earlier.

A negative earnings surprise means a company fails to achieve the market’s earnings expectations, which could trigger negative sentiment among investors and bring down stock prices.

“Overall, it was not a great earnings season. I am afraid it could be the best one in 2023,” said Hebe Chen, an analyst from IG Markets, reported Bloomberg.

The mining sector also appears to be in a tough spot during the first half of the financial year due to lower commodity prices, high inflation and capital expenditures, with major miners such as BHP Rio Tinto Group and Fortescue Metals reducing dividend payouts.

The company logo adorns the side of the BHP global headquarters in Melbourne, Australia, on Feb. 21, 2023. (William West/AFP via Getty Images)

In the food industry, higher expenses, including labour, fuel and packaging costs, significantly impacted companies and ate away at their profits.

Small enterprises also have a hard time with rising interest rates.

Australian Chamber of Commerce and Industry boss Andrew McKellar urged the RBA to pause any further increases to the cash rate.

The CEO explained that more small businesses were struggling to keep up with loans on capital assets and cover the ongoing costs of their operations.

“Households and small businesses have already stomached rapid rises and are still yet to experience their full effect,” he said.

“We are beginning to see signs that Australia has reached a turning point on inflation with negative household consumption growth and slowing economic activity recorded in the December quarter.”

McKellar warned that the RBA could raise rates faster than the economy could handle if it did not fully consider current economic conditions.

Greens Call For RBA To Be Reined In

Meanwhile, the Australian Greens Party have said that the tenth consecutive interest rate rise is a “clear indication that the central bank is out of control and needs to be reined in.”

“The RBA’s response to a problem it doesn’t understand with a solution that doesn’t suit is a form of institutional madness,” Greens Economic Justice spokesperson Senator Nick McKim said.

“The RBA itself has found that inflation is being primarily driven by supply-side shocks and corporate profiteering and has admitted that there is very little that monetary policy can do to offset supply shocks.

“It has also said that the monthly CPI indicator suggests inflation has peaked.”

“Yet despite all this, the RBA continues its relentless interest rate rises.”

MvKim is calling on the government to provide additional aid—via increased  taxes on corporate super profits and the wealthy—to renters and mortgage holders, who he said are being smashed “by the RBA’s dogmatic interest rate rises.”

“Instead of continuing to sit on its hands, the government should tax corporate super profits and the super wealthy then work with us to freeze rents, raise income support, and put dental and mental health into Medicare,” he said.

“The Greens call on the Treasurer to take immediate action to address the economic crisis caused by the RBA’s misguided policies and to start putting the interests of everyday Australians first.”