Economists have warned that the Reserve Bank of Australia is raising interest rates too fast, which could lead to a recession in Australia.
AMP Capital Markets economist Diana Mousina said Australians would soon feel the impact of higher interest rates, as about 60 per cent of home loan rates in Australia are variable. By comparison, in the US, 80%-90% of loans are fixed rate.
“Australia can’t raise interest rates as fast as the US,” she said. “I’m just worried that if interest rates rise to 3.5 per cent in the next six months, the Australian economy will collapse.”
The Reserve Bank of Australia has joined the world’s central banks in raising interest rates this year to keep inflation from running out of control. Having previously raised interest rates by 50 basis points three times in a row, raising the cash rate to 1.85%, most economists expect the Reserve Bank of Australia to continue raising interest rates by 50 basis points this month.
Jasmin Argyrou, head of fixed income at Credit Suisse Australia’s wealth management division, agreed that Australia should slow the pace of rate hikes as consumer confidence is in recession, which will sooner or later lead to lower household spending.
Argyrou believes the RBA will raise the cash rate to around 3.35 per cent this year, similar to the 3.3 per cent priced in the money market.
Australia’s retail sales rose 1.3% in July, easily beating economists’ forecast for a 0.3% rise, which usually suggests households are now well positioned to cope with higher interest rates.
Independent economist and climate committee member Nicki Hutley said the RBA underestimated inflation pressures last year and now risked going too far.
She said Australia was not seeing wage price spirals like the UK, parts of Europe and the US, and “I’m not too concerned about the inflation outlook here”.