Australians are being warned to expect rates to rise even further.Credit:Illustration by Matt Golding
Chalmers noted theReserve Bank made its decisions independently but the rate rise would make life harder for people with a mortgage,and it would be difficult for the bank to bring inflation down without crashing the economy.
“[The bank] will have lots of opportunities of course to explain and defend the decision that they’ve taken today,” he said at a press conference in Canberra following the RBA announcement.
“The job that the independent Reserve Bank has is to try and get on top of this inflation challenge in our economy without crashing our economy,and we’ve known for some time that that is a difficult path to tread.
“I do expect that there will be a lot of Australians who will find this decision difficult to understand and difficult to cop.”
Lowe said keeping the economy “on an even keel” would not be easy. He said the economy had started to slow and the labour market was easing,but it remained very tight.
There had been a pick-up in wage growth,he said,noting that public sector wages were likely to lift further while last week’s minimum wage increase was higher than last year. He also said that at the aggregate level,wages were still consistent with the RBA’s 2-3 per cent inflation target as long as productivity growth lifted.
HSBC’s chief economist for Australia,New Zealand and global commodities,Paul Bloxham,said the Fair Work Commission decision to lift award wages by 5.75 per cent had likely fed into Tuesday’s rate rise call.
“There is now a risk that the RBA needs to hike further,but at the same time,having delivered[4 percentage points] of tightening in just over 12 months there is also a clearly increasing risk that Australia has a harder landing,” he said.
“The narrow pathway to a soft landing is getting very narrow indeed.”
Business groups warned rising wages were adding to the risk inflation would remain high for too long.
Ai Group chief executive Innes Willox said the odds of the economic slowdown turning into a recession were shortening by the month,and a blowout in unemployment was on the cards.
“Wage pressures are growing and we are now at the point where current momentum will see further price pressures unless our stagnant productivity performance can be reignited,” he said.
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The Australian Chamber of Commerce and Industry said the Fair Work Commission had tried to downplay the implications of its wage decision,but there were risks it would have flow-on effects for other industries.
But Lowe said the most significant threat to the economy was still how households responded to the bank’s rate increases.
“Housing prices are rising again and some households have substantial savings buffers,although others are experiencing a painful squeeze on their finances,” Lowe said.
Shadow treasurer Angus Taylor said the federal government needed to take action against inflation instead of leaving it to the RBA.
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“Labor has been in government for a year,it’s delivered two budgets now and the truth of the matter is that they are forcing the Reserve Bank to do the heavy lifting,” he said.
Greens treasury spokesperson Nick McKim said the government should override the RBA’s decision because the central bank was waging a war against younger Australians.
“[The] RBA is smashing renters and mortgage holders in a pathological pursuit of price stability,” he said.
On Wednesday,the government will release the national accounts figures for the first three months of the year,and Chalmers said he expected them to show a “substantial slowing” of the economy in the next 12-18 months.
But when asked directly about the risk of a recession,Chalmers said it was not in any Treasury or Reserve Bank forecasts.
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