RBA Rate Hike Sparks Concerns Over Global Recession Risks

Governor Michele Bullock kept the door open to future changes yesterday, although she emphasized that such moves are not her primary aim.

Following a close decision by the monetary board to increase the cash rate by 25 basis points to 4.1 percent, their statement highlighted that the ongoing conflict presents “substantial risks in both directions.”

The board mentioned that this situation could lead to higher energy costs, thereby increasing inflation. However, these elevated prices, coupled with “prolonged uncertainty,” might eventually impact growth in Australia and its major trading partners.

“Our best contribution to achieving full employment and fostering investment and productivity is to maintain low and stable inflation,” Bullock stated yesterday.

“Therefore, we must remain focused on that objective,” she added.

“We don’t want to have a recession, but if it’s hard to get inflation down, then, you know, we’re going to have to deal with that possibly.”

Westpac Group chief economist Luci Ellis, who served as RBA assistant governor from 2016 to 2023, said the central bank’s comments after hiking the cash rate focused on how an “extended period of high energy prices” could reduce supply and drive up inflation.

“Most other observers would see that scenario as a global recession risk with rather different policy implications,” she said. 

“At the least, we struggle to imagine a scenario where the Strait of Hormuz remains closed for many months without sentiment and financial markets weakening considerably.

“The consequences for global growth in that scenario would be far from trivial, and not solely on the supply side.

“It is possible that the RBA’s assessment of the implications of the Middle East conflict will evolve once it has done modelling of the impact.”

Bullock said yesterday that the bank and probably the Treasury was looking into more advanced modelling of the conflict.

“We’ve done some modelling on sort of just very first-round pass-throughs of petrol price rises to inflation and – but we haven’t done any modelling on potential impacts if the war goes on.”

Oxford Economics modelling suggested the war had already added 0.3 percentage points to inflation in the first quarter of the year and could add another 0.75 percentage points in the next if oil stayed above $US100 ($141) a barrel.

“Against that backdrop, the RBA had little choice but to move again,” head of economic research and global trade Harry Murphy Cruise said.

“Oil price shocks are a central bank’s worst nightmare. The only thing that will bring oil prices down is more supply flowing through the Strait of Hormuz – and no amount of interest-rate hikes will convince Iran to reopen that passage. 

“Instead, the RBA must manage inflation (and inflation expectations) by slowing the rest of the economy. 

“That means dissuading spending on other goods to offset the inflationary impulse from higher fuel costs.”

Commonwealth Bank of Australia head of Australian economics Belinda Allen praised the bank for hiking rates, saying the only question was “when, not if” to do so and predicting another hike in May.

But she also sounded a note of caution on growth.

“We expect the war to be months, not weeks long, and also expect energy prices to rise from here,” she said.

“But so too could growth concerns, and the governor highlighted those risks several times in her press conference.”

Chartered Accountants ANZ chief economist Professor Richard Holden said the board’s decision to move now was both understandable and unsurprising.

“With global and domestic inflation moving up, but economic growth moving down, the RBA is in a bind,” he said.

“To fight inflation, it needs to raise rates. To counter the challenges to economic growth, it needs to cut them. That sounds spookily like 1970s-style stagflation.”

“It’s true that the RBA and other central banks try to ‘look through’ temporary shocks to inflation. But this shock is potentially so big and long-lasting that it is hard to do that.”

None of this is welcome news for Treasurer Jim Chalmers, who continues to list fighting inflation in his government’s top three economic goals while attempting to ease the pain for voters with cost-of-living measures ahead of the May budget.

He was at pains to stress the RBA didn’t point to government spending directly as an inflation driver but Bullock did say subsidies for costs such as energy prices could affect headline inflation, depending on their size.

Chalmers on last night told ABC’s 7.30 that a recession was “not something that we’re anticipating or forecasting or expecting”.

“Inflation has moderated significantly from its peak, but it is higher than we would like, and conflict overseas has put upward pressure on global fuel prices,” he said in a statement released earlier in the day.

“The duration of the conflict will be the primary determinant of how much pressure it adds to global inflation and how much it is a hit to growth.”

9News chief political editor Charles Croucher said the four-five split on the RBA board would give the treasurer and borrowers hope of avoiding another rate rise in May.

“Donald Trump and the ruthless regime in Iran probably hold the key, and unfortunately, they won’t be losing any sleep over Sydney mortgage holders tonight,” he said yesterday.

“The government cannot control what’s happening in the Middle East but the Reserve Bank noted that inflation was already too high before the war broke out. 

“That means the government must instead look to the budget. Jim Chalmers has nearly two months to publicly or privately or subtly or subliminally show the Reserve Bank that restraint will be the order of his budget.”

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