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The tenth increase in a row puts business and individuals under more pressure and the “wisdom of this decision is hard to understand”, says Deloitte.
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Inflation has peaked but further rate rises on the cards: RBA
08 March 2023
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10 minute read
The RBA raised interest rates for the tenth consecutive time yesterday by 25 basis points to 3.6 per cent despite acknowledging that inflation had peaked.
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Governor Philip Lowe said the economy had slowed and he recognised there was a lag inherent to monetary policy but said uncertainty remained over household spending.
“Growth in the Australian economy has slowed, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year,” said Mr Lowe.
“There is uncertainty around the timing and extent of the slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and also the increase in the cost of living.”
“Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world. These uncertainties mean that there are a range of potential scenarios for the Australian economy."
Head of Deloitte Access Economics Pradeep Philip said the decision to lift interest rates was hard to understand.
“This brings the cash rate to 3.6 per cent and with 10 interest rate rises on the trot – with most not having their full impact yet – it places further cost of living pressures on Australians while increasing the chance of an unnecessary recession,” said Mr Philip.
“The decision is the tenth consecutive increase since May 2022 and comes after national accounts and CPI data released last week revealed that both economic growth and inflation have slowed faster than expected, making the wisdom of this decision hard to understand.”
Mr Philip said tools other than interest rate hikes were needed to help tame inflation.
“As the RBA’s last statement on monetary policy recognised, around three-quarters of the increase in underlying inflation over the year to December 2022 was due to supply-side factors, with only one-quarter due to demand side factors and foreign shocks,” he said.
“Given interest rates attack inflation from the demand side, they are not fully effective in fighting inflation being driven by supply-side issues. Unfortunately, the RBA has few other tools at its disposal to help fight inflation and has indicated further rate lifts are to come.”
“We need to take a holistic look at ways to tame inflation, which necessitates a greater role for fiscal policy. In the meantime the RBA should pause rate hikes or it will overshoot and cruel the economy.”
Senior manager of business and investment policy at CPA Australia Gavan Ord said he was not surprised by the rise and inflated rates for an extended time would hurt already struggling organisations.
“While an end to monthly rate rises is in sight, interest rates will remain elevated for some time,” said Mr Ord.
“Businesses have faced years of difficulty due to the pandemic, rising costs, higher interest rates and economic uncertainty.”
“Businesses must be brave and accept that 2023 will continue to be a tough slog, those who are struggling, or expecting to feel the pinch need to act now and speak to their accountant.”
Chief economist at CreditorWatch Anneke Thompson said an increase ran counter to signals in the economy.
"Despite clear signs that the brakes are being slammed on the Australian economy, the RBA once again chose to increase the cash rate target,” she said. “This latest increase will take many borrowers – both personal and business – well past their lenders’ serviceability test and will be a serious drag on both consumer and business sentiment.”
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