Bendigo and Adelaide Bank: June Economic Update

The RBA’s additional rate hike this month has increased the probability of a hard landing for the economy.

In his latest economic update for 2023, Bendigo and Adelaide Bank Chief Economist, David Robertson explores the rationale behind the RBA’s announcement of its twelfth rate rise to 4.1%.

Interest rates

Contemplating the potential fall out of the latest RBA decision to continue to raise rates, Mr Robertson notes this decision will increase the likelihood of a recession.

“The June rate hike is now deeply into economic contraction territory, and while the language from the RBA hasn’t markedly changed, their impatience to get the inflation rate back to target ‘within a reasonable timeframe’ risks the soft landing that was our preferred scenario and further lifts the probability of a hard landing recession,” Mr Robertson said.

“The 4% of rate hikes we have witnessed in the past 14 months isn’t as aggressive a path as other comparable central banks have taken, however, given the greater proportion of variable rate mortgages in Australia, will continue to steadily impact domestic consumer demand.”

“Recent retail sales, consumer sentiment and jobs data all point to higher rates starting to slow the economy. We are still expected to have a lower peak in rates than elsewhere but given the RBA’s stated aim to ‘keep the economy on an even keel’, a cash rate above 4% makes this outcome much less likely,” Mr Robertson said.

Inflation
With the increase in inflation in April, our inflation rates are still lower than comparable economies. Mr Robertson expects inflation will fall to around 3.5% by the end of 2023.

“The RBA decision was no doubt impacted by the recent uptick in inflation in the monthly series for April, and their comment ‘while goods price inflation is slowing, services price inflation is still very high’ tells us that the RBA Board will maintain its tightening bias for some time,”

“Our recent peak in inflation was at a lower level than comparable economies, although our decline since the peak is evidently not fast enough for the RBA.”

“We still expect inflation to steadily fall to around 3.5% by year end 2023, but while the latest hike will speed up the path to 3% in 2024 it will also accelerate a rise in unemployment and underemployment,” Mr Robertson said.

Unemployment

“The unemployment rate rose to 3.7% in April, and we expect the jobless rate to be around 4.5% by year end, well above the RBA forecast of 4%. This forecast is at risk of faster deterioration as the economy slows,” Mr Robertson said.

“The RBA forecast of unemployment not exceeding 4.5% through 2025 also appears very ambitious given the extent of policy tightening,” Mr Robertson concluded.