RBA risks crashing economy with rapid rate hikes: Analysts

Bloomberg

Australia’s central bank risks raising interest rates too far too fast in its efforts to contain inflation, opening up the possibility of tipping the economy into recession, senior economists warned.
Unlike many international counterparts, Australians feel the impact of rate hikes quickly because about 60% of home loans are at variable rates, said Diana Mousina, a senior economist at AMP Capital Markets. In the US, 80%-90% of the loan book is on fixed rates, she said.
“Australia cannot raise rates as fast as the US,” she told a Bloomberg-hosted panel discussion. “I just worry that if we get interest rates rising to 3.5% in the next six months that we are going to crash the economy.”
The Reserve Bank of Australia has joined global counterparts from Washington to Wellington in rapidly tightening policy to try to prevent consumer prices from spiraling out of control. Headline inflation in Australia is running at more than twice the top end of the central bank’s 2-3% target.
The RBA has taken the cash rate to 1.85% with three consecutive 50 basis-point hikes and most economists expect another half-percentage point increase this month.
Jasmin Argyrou, head of fixed income and economics, wealth management at Credit Suisse Australia, also cautioned against the RBA tightening too quickly, pointing to recessionary-level consumer sentiment that will lead to a fall in household spending sooner or later.
“Australian household consumption will still run fast,” she said, while likening it to the cartoon Road Runner that continues at pace even after it has run off a cliff. “There is just nothing to underpin the Australian consumer once they have to face much higher interest costs.”
Argyrou sees the RBA raising the cash rate to about 3.35% this year, similar to money
market pricing of 3.3%.
Australian retail sales advanced 1.3% in July, easily beating economists’ forecasts for a 0.3% gain, suggesting households are currently
coping well with rate hikes.
Nicki Hutley, an independent economist and councilor at the Climate Council, says the RBA underestimated inflationary pressures last year and now risked “trying to go too far the other way.”
“I am less worried about the inflationary outlook here,” she said, adding that Australia is yet to see a wage-price spiral in the way they have in the UK, parts of Europe and the US.