The last time the cash rate was above 4 per cent was in early 2012 as the RBA was cutting interest rates to help support the economy. Inflation at the time was 1.6 per cent.
O’Donaghoe said much hinged on how consumers reacted to last year’s eight consecutive interest rate rises,noting if people continued to spend,the RBA might have to push up rates even higher.
Data to be released on Tuesday by the Australian Bureau of Statistics is expected to show a fall in the value of retail sales through December. Retail activity jumped by 1.4 per cent in November,partly due to highly advertised Black Friday and Cyber Monday sales. A drop in retail activity would be in addition to the fall in house and apartment prices.
CoreLogic’s daily home index shows values over the past three months down by 4 per cent in Sydney to January 30. Over the same period,values have fallen by 3.1 per cent in Melbourne.
Westpac chief economist Bill Evans said he expected the Reserve Bank to continue lifting rates to deal with ongoing inflation,although he believed it would stop short of taking the cash rate beyond 4 per cent.
“Persistent inflation pressures will see the RBA board raising the cash rate in February and March. After a pause in April,we expect a final move at the May meeting,in recognition of the persistence of demand-related inflation in the first half of 2023,” he said.
Ratings agency S&P Global on Monday said it expected the Australian economy to continue growing despite the higher rate settings put in place by the Reserve. The agency reaffirmed its AAA rating of Australia,which is one of just 11 nations with the highest possible credit rating.
S&P analyst Anthony Walker said the economic outlook for Australia was sound,although real GDP growth would slow in response to the Reserve Bank’s actions.
“Australian consumers are particularly sensitive to rising interest rates given their high level of household debt. Therefore,we expect consumption to be below trend over our forecast period as mortgage payments rise,” he said.
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“Australia’s economy will likely avoid recession and expand over the next three years. This reflects low unemployment and high commodity prices. Australia benefits from being a net energy exporter.”
Finance Department figures last week showed thefederal budget bottom line was $11.5 billion better than had been forecast by Treasurer Jim Chalmers in October.
Chalmers said S&P’s decision backed the government’s budget strategy.
“This is a strong endorsement of the Albanese government’s budget and economic plan. S&P has recognised Australia’s improving budget balance,spending restraint and reforms to sustain economic growth,” he said.
Walker said the budget deficit and total government debt were on track to improve over the coming years.
“Reinforcing our assessment of Australia’s fiscal position is our view that it has displayed more willingness than its peers to raise revenues and contain expenditures,” he said.
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