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The 0.25 per cent hike in interest rates surprised many pundits with warnings that the RBA was playing “recession roulette” with the Australian economy after most believed the aggressive interest rate tightening cycle had ended with a pause in April.

The move, which brings the cash rate to its highest level since April 2012 and is the 11th increase in a 12-month span, had others warning that the move would throw homeowners into financial stress as they are already battered by the crisis of the housing market. cost of living.

The rate increase will be hardest felt by Australia’s 3.2 million mortgaged households.

But Dr Lowe defended the bank’s latest move, insisting there would be “worse prospects” for the country if rate hikes were not followed through.

He said taming stubborn inflation within a reasonable time frame to the target range of 2 to 3 percent had a major impact on their decision to raise rates again.

“I know that higher interest rates are unwelcome to many people, but the alternative is continued high inflation and eventually even higher interest rates and worse job prospects,” he said at an RBA board dinner in Perth on Tuesday.

Despite data from March showing that inflation had peaked at 7.8 percent in the December quarter and had fallen to 7 percent in March, this did not change the RBA’s view that it would be “some time before inflation is back in the target range”. ”, said Dr. Lowe.

He added that the decision to pause rate hikes in April was to “give us more time to assess the pulse of the economy and the outlook”, but worrying data had emerged since then.

This included the low unemployment rate, an increase in real estate prices and continued high inflation in services, including rents which recorded their largest increase since March 2010.

“There is a very limited supply of rental properties and rents in Perth have risen even faster than elsewhere in the country,” he said.

‘Life is getting harder’

Dr. Lowe revealed that the central bank took longer than other countries to reduce inflation to support employment, but it cannot wait “too long”.

“We are taking a bit longer than some other countries, assuming that this can preserve some of the gains in the labor market,” Dr Lowe said.

“But there is a limit here. If we take too long to get inflation back up to par, expectations will adjust and life will get harder.”

However, he acknowledged that the RBA was “travelling on a narrow path” to address inflation while at the same time risking pushing the Australian economy into recession.

But he added that economic data showed there was “some confidence” that it could keep the economy “balanced”.

Dr. Lowe urged Australians to “have confidence that inflation will come down and return to target”.

“If people think inflation will remain high, they will understandably adjust their behavior,” he said.

“Companies will be more willing to raise their prices and workers will seek bigger pay raises. If this adjustment in expectations were to happen, high inflation would become entrenched and the end result would be even higher interest rates and worse job prospects.

“For these reasons, the board is resolute in its commitment to bring inflation back to target within a reasonable timeframe.”

‘Full recession’

But Clifford Bennett, chief economist at ACY Securities, was scathing about the RBA’s decision to raise rates, predicting a “full-blown recession for Australia”.

“It’s interesting that the RBA recognized that consumer spending is moderating — there’s a slowdown — and yet chose to raise rates again?” he said.

“Even though nothing has changed from their previous meeting. Inflation was stubbornly high at the time.

“There is no doubt that this rate hike, with accompanying commentary suggesting further rate hikes are imminent, will completely take the wind out of the sails of the temporary stabilization in the real estate market. It will also certainly plunge Australia deep into recession.”

Mr Bennett said the inflation problem remains a serious one and he has forecast a higher final rate closer to 4.5 per cent to 5.5 per cent.

“That looks like where we are going now. However, given the earlier pause, it appeared that the RBA had recognized that it was too late to recognize the skyrocketing inflation in the first place, and that consumers and businesses were in significant pain from the price increases alone,” he said.

“Therefore, raising interest rates risked weakening activity too much; one that would cause an outright recession. Expect Australia to see that full-blown recession in the second half of this year as the RBA continues to blunder its way forward.

More rate hikes ahead

Meanwhile, Dr Lowe said inflation in overseas services was “worrying” and persistently high.

“It is possible that conditions here in Australia are different, but the experience abroad points to upside risk, particularly given the high degree of convergence between countries in inflation dynamics of recent times,” said Dr Lowe.

“Given this flood of data and our assessment of the outlook, the board judged it appropriate to raise interest rates again.”

In his post-meeting statement, Dr Lowe also warned that more rate hikes could be made “but that will depend on how the economy and inflation evolves”, with the board considering the global economy, household spending trends and prospects for the future. will follow. inflation.

“The board remains resolute in its determination to bring inflation back to target and will do whatever it takes to achieve that,” he added.

Dr. Brendan Rynne, KPMG’s chief economist, believes interest rates need to rise to more aggressively bring inflation back to target, but thinks another 0.25 percent increase “will be enough”.

“Monetary policy works with a lag, but given the dynamics in the residential mortgage market, it really works in two phases at the moment, given the number of mortgage holders who still enjoy low-interest, fixed-rate mortgages,” he said .

“KPMG’s analysis shows that these mortgages taken out during Covid are starting to expire, but this process will accelerate from the middle of this year.

“So, in effect, the RBA does not need to raise rates again as there is an automatic rise in effective mortgage rates across the country that has a profile consistent with the roll-off of fixed-rate mortgages. In fact, households that have shielded themselves from past rate hikes will gradually feel their full effect over the coming year, further enforcing the monetary policy decisions made since May 2022.”

Some experts have also predicted a rate cut of 0.25 percent by August 2024 and another 0.5 percent by the end of 2024.