Warning Australia will enter a deep recession unless the Reserve Bank cuts interest rates in 2023

Australia risks plunging into a severe recession unless the Reserve Bank starts cutting interest rates by Christmas, major banks are warning.

Tuesday’s 0.25 percentage point increase took the spot rate to a new 10-year high of 3.35% and marked the ninth consecutive monthly increase.

Three of Australia’s big four banks – Commonwealth, Westpac and ANZ – are now expecting two more hikes, which would take the cash rate to an 11-year high of 3.85% by April or May.

AMP Capital’s chief economist, Shane Oliver, said another quarter-percentage-point rate hike on top of that – taking the cash rate to 4.1% – would trigger a severe recession. .

“To continue much further down the path of rate hikes in response to inflation, which is a lagging indicator, while ignoring the lagged flow of rate hikes through the economy, signs of slowing demand and improving supply risk plunging the economy into a recession we ‘didn’t force’, Dr Oliver said.

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He referenced former Labor Treasurer Paul Keating’s famous quip – ‘this is the recession Australia had to have’ – to note that this would be the first interest rate-induced recession since 1991.

Commonwealth Bank’s Australian economics chief Gareth Aird said the RBA should cut interest rates by half a percentage point in the December 2023 quarter “to avoid a hard landing”, followed by 50 basis points of cuts by the first half of 2024.

Mark Bouris, founder and former chairman of Wizard Home Loans, said the Reserve Bank’s focus on fighting inflation would spell disaster for the economy.

“People are going to start panicking, people are going to stop buying real estate, small business owners are going to start collapsing or closing their businesses, and owners are going to stop spending,” he said. Wednesday on Nine’s Today Show.

“It’s calamitous from my point of view.”

Treasurer Jim Chalmers played down the suggestion that higher interest rates would lead to a recession, referring to his department.

“Treasury forecasters expect higher interest rates combined with tough global conditions to significantly slow our economy, but they don’t expect a recession here in Australia at this stage,” he said. he told ABC Radio National.

Inflation jumped to 7.8% last year, the highest annual pace since 1990 and well above the RBA’s 2-3% target.

Mr Bouris said the RBA had not explained when it would start cutting rates, based on moderating inflation levels.

“They never indicated where the inflection point came from,” he said.

“There is a lot of confusion and to be frank with you, and I think there is a loss of confidence in the Reserve Bank.

“They got it wrong 18 months ago, I think they got it wrong now.

“From my point of view, it’s a bad policy because nobody knows what’s going on.”

ANZ was the first major bank to pass on the RBA’s latest rate hike with its variable rate for borrowers with a 20% deposit rising to 5.19% from 4.94% on February 17.

NAB followed suit, raising its floating rate equivalent to 5.24% from 4.99%, also effective Feb. 17.

If the Commonwealth Bank did the same, as expected, its variable rate would drop from 4.97% to 5.22%.

A CBA borrower with an average mortgage of $600,000 would see their monthly repayments increase an additional $93 to $3,303, up from $3,210 previously.

Annual repayments would be $11,964 higher than they were at the start of May 2022, when the Commonwealth Bank offered a floating rate of 2.29% below a record RBA cash rate of 0.1%.

RBA Governor Philip Lowe changed his language on Tuesday to warn of further rate hikes to fight inflation, after suggesting in 2021 that rates would remain unchanged until 2024.

“The board expects that further interest rate increases will be needed over the coming months to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said. he declared.

“The board remains resolute in its determination to bring inflation back to its target and will do what is necessary to achieve this.”

The futures market readjusted its forecast for interest rates to reach 3.9% by July.