Reserve Bank’s economic path narrows

The Australian Bureau of Statistics will release the March quarter national accounts on Wednesday. The Reserve Bank is forecasting the economy to expand by just 1.25 per cent this year.

Most economists are tipping the economy to have grown between 0.2 and 0.3 per cent through the first three months of the year, with household consumption slipping.

Barrenjoey chief economist Jo Masters said the narrow path was trying to reach the right balance between inflation and overall economic activity.

“It’s raising interest rates just enough to slow the economy just enough to bring inflation back to target with minimal long-term economic scarring,” she said.

“The path is narrowing both as policy is restrictive but also reflecting the nature of price pressures, which are now being driven by sticky (or persistent) services inflation, and weak productivity growth.

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“While wage growth remains relatively contained compared to our peers, productivity growth suggests the speed limit may be lower than the long-held rule of thumb that 4 to 5 per cent wage growth is consistent with the inflation target band.”

An interest rate increase on Tuesday would add to the financial pressure facing mortgage holders. On a $600,000 mortgage, monthly repayments have climbed by about $1300 since May last year.

Australia’s “misery” index, which tracks the impact of movements in interest rates, inflation and unemployment, is now at its highest point since the global financial crisis in 2008.

On Monday, Deutsche Bank senior economist Phil O’Donaghoe said he now believed the RBA would take the official cash rate to 4.6 per cent by September in a move that would add another $300 to monthly repayments on a $600,000 loan.

“The economy is withstanding the hiking cycle better than most seemed to think likely. That complicates the RBA’s task of getting inflation back to target from its current intolerably high levels,” he said.

Commonwealth Bank’s head of Australian economics, Gareth Aird, said the narrow path was largely about bringing down inflation while preserving the extraordinary gains in total employment.

“Another way to think about it is that the narrow path is really about getting inflation down without causing a recession,” he said.

“I think we will pull it off in Australia as we don’t have a wages problem and that means we don’t need the unemployment rate to go up much to get inflation down, particularly as spending is slowing a lot. It will require rate cuts in 2024 as well in our view.”

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Macroeconomics Advisory managing director Stephen Anthony said a mild recession was still possible for Australia this year, and warned fiscal and monetary policy were working at cross-purposes and there remained no serious structural economic reform agenda.

“A base case is slow growth, probably a somewhat softer labour market and declining inflation,” he said.

AMP Capital chief economist Shane Oliver is increasingly fearful the Reserve Bank could drive the economy into a recession by lifting interest rates too high.

Oliver said the path being traversed by the RBA had “narrowed significantly”.

“The risk is now very high that ongoing inflation and wages concerns will see the RBA over-tighten and knock the economy off the narrow path into recession,” he said.

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