Economists Keep Watch as Reserve Bank of Australia Determines Interest Rates

The Reserve Bank of Australia’s stance on interest rates has garnered much attention from economists this quarter. The bank has raised interest rates significantly in an attempt to reduce domestic inflation, but recent data shows a slowdown. The Consumer Price Index only increased by 0.2% for the month of February, signaling a possible halt to further rate hikes. However, RBA considered it to be fit to raise another 0.25 percent.

Economists are divided on the outlook for interest rates. Some suggest that the low inflation rate recorded for February meant that any further rate hikes could risk pushing the domestic economy into a recession. In fact, local activity has already stalled in industries like housing construction, local tourism, and recreational industries.

On the other hand, some argue that inflation remains above the Reserve Bank’s preferred range of 2-3%, and that consumer spending has remained high despite recent rate hikes. There are also growing fears of recession following the ACTU’s push this year for a 7% increase in the minimum wage from $21.38 an hour to $22.88, making the minimum wage $45,337 annually for 2.4 million workers–a $3,000 pay raise.

The ACTU argues that low-income workers spend every cent they earn, and that an increase is necessary to keep the local economy growing and prevent impoverished workers. Business groups point to Australia’s low productivity gains and higher funding costs to argue against any pay increases.

This comes hard on the heels of last year’s minimum wage rise of 5.2 per cent. Moreover, the ACTU is pushing for this increase to flow to a range of other award rates, prompting concerns any such move could spark a wage rise – price hike spiral, reminiscent of the 1970’s.

Meanwhile, the Federal Government will release its budget this quarter. One priority is whether the Government will address the significant structural funding issues within the budget and control the budget deficit.

Although Government revenues have been bolstered by strong international trading conditions for Australia’s key exports of iron ore, coal and wheat, the Federal Government spends more than it receives by way of taxes. Recent decisions to acquire a new fleet of state-of-the-art submarines and military equipment will add billions of dollars to government spending over the next few decades. This is happening while the Government also spends billions to transition away from fossil fuel energy sources and build a new low carbon economy.

Finally, a growing number of economists believe that the US economy is headed for recession this year. This belief comes in the face of the central bank’s increasing local interest rates to deal with domestic inflation. While US employment figures remain strong, US and international banks have been under undue pressure from recent rate hikes. Two high-profile banks have already collapsed in recent months, which puts the remaining banks under more pressure to retract from lending to businesses. This could increase the depth and likelihood of any pending recession.