‘Severe recession’: RBA’s grim warning about inflation

Reserve Bank Governor Philip Lowe has issued a warning about inflation, saying that Australia risks a “severe recession” if the organisation doesn’t lift interest rates to combat the cost of living.

“The eel of inflation will be with us for longer [if we don’t lift rates] and the eventual increase in interest rates needed to bring inflation down will be even larger is would increase the risk of a seed, severe recession, and a sharp rise in unemployment,” he said during a speech to business leaders in Hobart on Tuesday.

The RBA lifted Australia’s cash rate another 25 basis points to 2.85 per cent on Tuesday, a smaller rise than previous months, but Dr Lowe indicated the central bank would be carefully looking at the effect of current rates on the economy and considering larger rises in the immediate future.

Dr Lowe indicated interest rates may need to be hiked even higher during Australia’s cost of living crisis, saying that the bank will be “very carefully” watching inflation over the summer.

“We need to bring inflation back to target and I think it will require higher interest rates and our forecasts have been prepared on that basis,” Dr Lowe said.

“We are not on a preset path here.”

Senior economists have predicted that the RBA will lift the cash rate by at least another 25 basis points by the end of the year, with Westpac predicting that the rate could peak at 3.85 per cent next year.

The cost of living has skyrocketed for all households, new figures from the Australian Bureau of Statistics have found.

The living cost index, figures measuring the price change of goods and services and its effects on the living expenses of different households types, has shown a hit to the hip pocket for most Australians.

Pensioners and those on government payments were hit with a cost of living increase in line with the quarterly change in CPI of 1.8 per cent, meanwhile employee households were whacked with a 2.6 per cent increase.

Employee households were particularly impacted by increases in mortgage interest charges, which rose on average 24.2 per cent over the quarter as the banks passed on the RBA’s cash rate rises.

Food costs also significantly strained household budgets, with the cost of supply chain disruptions, increased transport prices and floods adding up.

Dr Lowe indicated rate hikes could become more aggressive in response to ever-rising inflation.

“If we need to step up to larger increases again to secure a return of inflation to target we will do that,” he said. Just how aggressive the hikes will be will rely on how the Australian economy unfolds over the next few months.

“Similarly, if the situation requires us to hold steady for a while, we will do that,” he said.

“Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”

Inflation is now predicted to reach 8 per cent this year, much higher than the 2-3 per cent target set by the RBA, a goal Dr Lowe said he was “committed to doing what’s necessary to achieve”.

“The board is seeking to return inflation to two to three per cent, while at the same time keeping the economy on an even keel. I think it is still possible to do this,” he said

Mortgage holders with a loan of $500,000 are now paying $760 more per month than they were in May according to RateCity.

That number jumps to $1,140 per month for a $750,000 loan and $1,520 per month for a $1 million loan.

Treasurer Jim Chalmers has expressed sympathy for mortgage holders struggling with repayments.

“This is another difficult day for Australians who are already under the pump,”Dr Chalmers said shortly after the latest cash rate decision was handed down.

Dr Lowe also flagged potential issues that could be problematic when trying to bring down inflation.

“In the short term, the east coast floods are adding to the upwards pressure on food prices, and next year there are likely to be very large increases in the prices that households pay for gas and electricity,” he said.

“This means Australians with a mortgage will have to find that little bit extra in their monthly budget to accommodate these interest rates.”