The “R-word” has rattled global financial markets in recent weeks as central banks try to curb inflation, but the risk of a recession in Australia is not on Reserve Bank governor Philip Lowe’s horizon.
But Dr Lowe used a long-awaited speech to emphasise that the central bank will do what is necessary to get inflation back within target and households need to prepare for further interest rate rises.
Addressing an event in Sydney on Tuesday, Dr Lowe said the Australian economy has a lot of positives going for it – low unemployment, strong household budgets and the highest terms of trade ever.
“So we don’t see a recession on the horizon,” he said in answer to a question after delivering a speech to the American Chamber of Commerce in Australia.
“But if the last two years has taught us anything, you can’t rule anything out.”
Treasurer Jim Chalmers agreed the risk of a recession is not what the government sees as occurring.
“I have said a number of times, you know, we have reason to be cautiously optimistic about the future of our economy but first we need to navigate these difficulties which are right ahead of us,” Dr Chalmers told reporters in Brisbane.
Dr Lowe said while rising inflation had been driven by global events, increasingly domestic factors were coming into play, such as rising petrol and energy costs.
The RBA has raised its inflation forecast to a peak of around seven per cent in the December quarter, having earlier predicted a top of six per cent.
“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues people’s savings,” Dr Lowe said in explaining why it needed to be brought under control and within the two to three per cent target.
The RBA board has raised the cash rate at its past two monthly meetings by a total of 75 basis points, the latter being a 50 basis point increase and the largest rise since February 2000.
Economists are predicting another 50 basis point rise in July, which would take the cash rate to 1.35 per cent.
The minutes of the June board meeting, also released on Tuesday, show the options of a 25 or 50 basis point increase were discussed, with the latter chosen in the face of a bigger rise in inflation than earlier predicted.
“I would expect we will have the same discussion again at the next meeting (in July),” Dr Lowe said when asked whether a 75 basis point increase would be considered, matching the size of the US Federal Reserve’s latest hike.
Financial markets are pricing in a cash rate of four per cent by the end of this year, which Dr Lowe thought was unlikely.
“But the market has been a better judge of where interest have been going than we have over the past couple of years, so you have to pay attention,” he conceded.
Meanwhile, consumer confidence showed a modest improvement in the past week, buoyed by the latest employment figures.
But it remains mired deep in pessimistic territory in the face of rising inflation and interest rates.
The ANZ-Roy Morgan consumer confidence index rose 1.6 per cent to 81.7, a partial recovery from the 7.6 per cent slump a week earlier to its lowest level since April 2020.
“News about the strength of the labour market may have boosted sentiment, but it remains deeply pessimistic,” ANZ head of Australian economic David Plank said.
Last week’s labour force figures showed employment jumped by 60,600 in May, keeping the unemployment rate at a near-50 year low of 3.9 per cent.
Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)