Australia’s top economists are grappling with how quickly the RBA should raise interest rates to stamp out inflation without triggering an economic downturn.
The Reserve Bank will increase interest rates on Tuesday but the prospect of further aggressive rate rises needed to tame inflation could cause a sharp economic slowdown, warned market economists.survey of 31 economists expect
"What the market thinks is one thing," said independent economist Michael Blythe of Pinpoint Macro, with a nod to the bond market's hawkish assumptions of RBA tightening. "What the RBA can feasibly deliver is another."Mr Blythe's analysis of households suggests a 3.5 per cent cash rate would return debt serviceability to 2008 levels, "a time of significant household stress".
Deutsche Bank’s Philip O’Donoghue thinks the RBA should go even harder in August – after the second quarter consumer price index is released, which he expects to be significantly stronger than the central bank’s forecasts – and lift the rate by 75 basis points. “We think the RBA will front-load rate hikes. This will slow the Australian economy, primarily through household spending, as debt servicing costs rise and housing prices fall,” said Gareth Aird, head of Australian economics at CBA.
“The RBA is playing catch-up,” Ms Ell said. “The pace of monetary policy normalisation in Australia is highly uncertain.” She also speculated that the RBA might need to “overshoot” the 3 per cent level on the cash rate to succeed with its inflation battle.inflation would peak at 7 per cent later this year, but global pressures would ease in early 2023.The strengthening labour market will cause Australia’s jobless rate to fall to 3.7 per cent by the end of this year, before edging up to 3.
"Yes, there is a risk of a sharp slowdown, but we expect the deceleration in growth over the coming years will be manageable," Goldman's Mr Boak said.But strong household and corporate balance sheets will only be able to absorb rate rises for so long, according to Morgan Stanley, before Australia’s economy succumbs to the effects of tighter financial conditions.
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