Finance Finance News ‘Inflationary storm’: RBA hikes interest rates to contain fallout as prices surge

‘Inflationary storm’: RBA hikes interest rates to contain fallout as prices surge

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The Reserve Bank has slapped households with another painful interest rate hike in July as it tries to curb soaring inflation, with typical mortgage repayments set to rise by $144 within hours.

Economists said the bank’s third rate hike in as many months on Tuesday was needed to tame rising prices.

But they warned the increases wouldn’t actually fix many key issues driving the huge inflation spike.

Rather, Australians are being warned to brace for even higher prices for essentials like petrol, groceries and energy over the next six months, alongside rapidly rising mortgage bills and falling property prices.

It’s a worsening cost-of-living crisis that economists fear is increasing the risk of a recession later this year – though it’s still seen as unlikely.

Rates hiked, again

RBA governor Philip Lowe addressed the bleak outlook on Tuesday, blaming supply chain issues and high local demand for rising inflation.

“Global inflation is high. It is being boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand, which is putting pressure on productive capacity,” he said.

“Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices.”

Responding to these pressures, the RBA unveiled a 0.5 percentage point rise in its cash rate target on Tuesday afternoon, taking the official rate to 1.35 per cent.

Rates have now risen to their highest level since 2019 from a record low just three months ago.

The moves are designed to squeeze household budgets so that Australians spend less on goods and services – a cooling of the economy that will make it harder for firms to raise prices as fewer people will be able to afford them.

But independent economist Saul Eslake and others argue higher rates won’t solve key global issues that have pushed inflation to decade highs.

Instead, they said the RBA is looking to contain the damage by stopping inflation expectations from spiralling out of control in coming months.

“Higher rates can’t stop the war in Ukraine. They can’t fix broken supply chains, and they can’t push down petrol prices,” Mr Eslake told TND.

“But central banks aren’t trying to do that – they’re trying to make it more difficult for businesses to pass through those higher costs to prices by weakening demand.”

Such an outlook is cold comfort for households, who are navigating a huge rise in mortgage costs thanks to the past three rate hikes.

Tuesday’s move brought the total rise in typical monthly mortgage bills since May to about $350, according to Canstar, while further hikes could deliver a cumulative increase of $792 by the end of the year.

Recession fears grow

Rising pressures on household budgets are driving growing fears that Australia could fall into a new recession later this year.

Economists fear central banks like the RBA will hike rates too quickly in their battle to control inflation and could cause economic activity to go backwards as a result.

Dr Lowe said he’s not expecting a recession in Australia, but US central bank boss Jerome Powell has warned about a downturn there.

Economists said recession risks are higher in the US and Europe than in Australia, but the risk of a local downturn was increasing.

The key issue is uncertainty over how long and difficult the current wave of inflation will be, Indeed APAC economist Callam Pickering explained.

“Given [inflation is] tied to both a global pandemic and a war, it’s safe to say nobody knows the answer,” he said.

“The ability of households and businesses to weather the inflationary storm declines the longer it lasts … if it lasts too long then a recession becomes increasingly possible.”

The RBA forecasts inflation to rise from 5.1 per cent in March to 7 per cent later this year, before gradually falling back to its 2 to 3 per cent target over the next couple of years.

Dr Lowe has warned it may be several years before inflation is back into the central bank’s target range.