There are fresh warnings of a “huge risk” the economy could be plunged into recession if the Reserve Bank ignores calls to temper interest rate hikes.
A week after the central bank board lifted the cash rate to 3.35 per cent, governor Philip Lowe appeared at a senate estimates hearing, cautioning more rate rises were on the cards.
Financial markets now expect the cash rate to hit 4.1 per cent by August but Dr Lowe could not say when rates were going to peak in the bank’s fight against inflation.
AMP chief economist Shane Oliver warned it was possible further rate hikes could plunge the economy into recession.
“I think we are getting close to the top because there is a lot of evidence that globally inflation has peaked … It’s just a question of how much further we go,” he told NCA NewsWire.
“I don’t think we need to go above 4 per cent. There are other economists who say we will go above 4 per cent.
“I worry that if we get to that level it’s going to cause big problems for Australian households with mortgages and potentially knock the economy into recession.”
The RBA and Treasury both believe inflation peaked at a near three decade high of 7.8 per cent in the December quarter.
Raising interest rates is the RBA’s mechanism for fighting inflation. Dr Lowe acknowledged on Wednesday it would make him “unpopular” among those already financially struggling.
“It‘s the job of the central bank to do sometimes what’s unpopular in the national interest,” he said.
Another increase is all but a “done deal” for March, BIS Oxford Economics’ Sean Langcake said, with further hikes possible for April and May.
“It’s kind of a choice of taking your medicine now,” he told NCA NewsWire.
“It depends on how they choose to read the data that comes in … It’s a lot more art than science at this point.”
Dr Oliver said he was curious to know what the “tipping point” would be for the RBA and warned there was a potential to repeat the mistakes of the last recession.
“Sometimes you don’t know before you‘ve gone beyond it, which was the experience in the late 80s, early 90s, hiking rates and then suddenly we’ve gone too far,” he said.
“That’s a huge risk.”
He said he would like to see the bank hit the pause button and allow time for the data to reflect the increases already in the system.
“It takes two to three months before mortgage rate hikes or variable interest rate hikes play through. Mortgages take even longer now because of the greater proportion of people on fixed rates,” Dr Oliver.
“There’s 800,000 or so people on fixed rates who will see their interest rates double this year. All of that is yet to play out.
“So there’s an argument to sort of sit back for a while and see what all the impact has been.”
Mr Langcake agreed there were “enormous risks” either way.
“That’s what makes it really challenging at the moment,” he added.