Recession warning for Australia with major banks all forecasting interest rate hikes in February

Australia could slide into recession if the Reserve Bank raises rates just one more time, an economist warns.

The Big Four banks all expect a rate hike on Feb. 7 that would take spot rates to a new 10-year high of 3.35 percent — the ninth consecutive hike.

Deloitte Access Economics partner Stephen Smith, an economist, said even another rate hike in 2023 could push Australia into recession.

Australia could slide into recession if the Reserve Bank raises rates just one more time, warns Deloitte Access Economics partner Stephen Smith, an economist (pictured is an auction in Melbourne in 2022)

Australia could slide into recession if the Reserve Bank raises rates just one more time, warns Deloitte Access Economics partner Stephen Smith, an economist (pictured is an auction in Melbourne in 2022)

“In our view, further increases in cash rates above the current 3.1 per cent could unnecessarily push Australia into recession by 2023,” Smith said.

“According to the Reserve Bank’s own calculations, mortgage amortizations, including principal and interest, are already on track to rise to record highs as a percentage of household disposable income in the coming months.”

What another rate increase would mean for YOU

$500,000: $77 up to $2,752 from $2,675

$600,000: $93 up to $3,303 from $3,210

$700,000: $108 up to $3,853 from $3,745

$800,000: $123 up to $4,403 from $4,280

$900,000: $139 up to $4,954 from $4,815

$1,000,000: $154 up to $5,504 from $5,350

Calculations based on Commonwealth Bank floating rate loan rising from 4.97 percent to 5.22 percent to reflect Reserve Bank of Australia cash interest rising from 3.1 percent to 3.35 percentcompared to a 66 percent to 100 percent chance in New Zealand.

Credit rating agency Moody’s Analytics says the chance of a recession in Australia over the next year is one in three, compared to a 66 to 100 percent chance in New Zealand.

The Commonwealth Bank, Westpac, ANZ and NAB expect rate hikes of a quarter of a percentage point each next month, following last Wednesday’s release of official inflation data for the December quarter.

In this scenario, a borrower with an average mortgage of $600,000 would see their monthly payments increase by $93 to $3,303, up from $3,210.

A couple in Sydney with a $1 million mortgage would see their repayments increase by $154 to $5,504 from $5,350.

Both increases are based on a Commonwealth Bank variable rising from 4.97 percent from 5.22 percent to 5.22 percent, to reflect the increase in the RBA cash rate from 3.1 percent to 3.35 percent. to give.

Mr Smith said the Reserve Bank should keep interest rates on hold even though inflation is now well above the long-standing target of 2 to 3 percent.

“There is evidence from Everest that suggests interest rates should be on hold from here on out,” he said.

Inflation in the year to September rose 7.3 percent, and the Reserve Bank expects December quarterly data to push the annual consumer price index up 8 percent, a level not seen since 1990.

Moody's Analytics still estimates the chance of a recession in Australia over the next 12 months as a zero to 32 percent chance, compared to a 66 percent to 100 percent chance in New Zealand

Moody's Analytics still estimates the chance of a recession in Australia over the next 12 months as a zero to 32 percent chance, compared to a 66 percent to 100 percent chance in New Zealand

Moody’s Analytics still estimates the chance of a recession in Australia over the next 12 months as a zero to 32 percent chance, compared to a 66 percent to 100 percent chance in New Zealand

Westpac expects figures from the Australian Bureau of Statistics to show a more moderate inflation rate of 7.4 percent for the year to December.

Chief economist Bill Evans said that while global supply constraints were likely to ease, higher wages would still keep inflation high as consumers also struggled with higher gas and electricity prices.

“Australian wage inflation is still rising as labor markets remain tight through the first half of the year,” he said.

Westpac expects interest rate hikes in February, March and May, which would push the Reserve Bank’s cash rate to an 11-year high of 3.85 percent.

The Commonwealth Bank, Australia’s largest lender, expects the February rate hike to be the last of this monetary tightening cycle.

But CBA’s head of Australia’s economy Gareth Aird expects inflation to peak at 7.7 percent by the end of 2022.

“We expect inflationary pressures to ease relatively quickly in 2023. But the annual rate should increase further,” he said.

Deloitte Access Economics expects inflation to moderate to 7.2 percent by June 2023 and fall back to 3.9 percent in 2023-24.

The Commonwealth Bank, Westpac, ANZ and NAB all expect interest rates to rise by a quarter of a percentage point next month, following Wednesday's release of official inflation data for the December quarter (pictured is the Reserve Bank of Australia building in Sydney)

The Commonwealth Bank, Westpac, ANZ and NAB all expect interest rates to rise by a quarter of a percentage point next month, following Wednesday's release of official inflation data for the December quarter (pictured is the Reserve Bank of Australia building in Sydney)

The Commonwealth Bank, Westpac, ANZ and NAB all expect interest rates to rise by a quarter of a percentage point next month, following Wednesday’s release of official inflation data for the December quarter (pictured is the Reserve Bank of Australia building in Sydney)

The Reserve Bank raised interest rates eight times last year, marking the most severe pace of tightening since it began publishing a target cash rate in 1990, and did not put them on hold until January because that was the only month in which she does not comply.

Should a recession happen in 2023, it would be the first interest rate-driven economic contraction since 1991.

Australia’s 29-year run without a recession was interrupted in 2020 by national Covid lockdowns before the Reserve Bank cut cash rates to a record low of 0.1 per cent later that year.

Reserve Bank Governor Philip Lowe pledged in 2021 to hold interest rates until 2024 at the earliest, before raising rates in May 2022 for the first time since November 2010.

In a sign that inflation may have peaked, used car prices have fallen 12 percent since May on a reduction in the global shortage of computer chips that was hampering car production, data for December from Datium Insights and Moody’s Analytics.

“The decline is driven by an increased supply of new vehicles as the semiconductor shortage eases,” it said.

Rising interest rates would also make Australians less likely to pay a premium on a used car, with a 10 per cent drop predicted for 2023.

In addition, rising interest rates on car loans could push certain potential car buyers out of the market or shift their preference to lower-cost vehicles, according to Moody’s Analytics.

“The demand for new and used vehicles will decrease in 2023. Australian households are under pressure from rising borrowing costs.”

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