Latest rate hike risks ‘unnecessary pain’, warns BDO
The latest rate hike will place increased pressure on small business and raises the risk of a recession, the accounting industry cautions.
The RBA’s decision to increase interest rates again this month “risks recession and unnecessary pain” according to mid-tier firm BDO, with the effect of recent rate rises yet to play out.
The Reserve Bank of Australia increased the cash rate target again in its monthly meeting yesterday, raising it by 25 basis points up to 4.10 per cent.
In a statement issued by the RBA, Governor Philip Lowe said while inflation may have passed its peak, at 7 per cent it remained too high and would take time to return to the target range.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” said Mr Lowe.
“Recent data indicates that the upside risks to the inflation outlook have increased and the board has responded to this. While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”
BDO EconSearch partner Anders Magnusson said past RBA increases have already locked in the effects necessary to bring inflation down closer to the target range of 2 to 3 per cent in the medium term.
“Both purchasing power of consumers and labour market indicators are showing that the levers vital for bringing down inflation are in motion,” said Mr Magnusson.
The housing market also continues to put downward pressure on consumer spending as more homeowners move from fixed to variable mortgages and rents continue to increase.
While employed Australians are working more hours than a year ago and unemployment remains low, Mr Magnusson said that decreasing real wages and job vacancies have reduced the risk of inflation from a tight labour market.
“The next release of the ABS data will hopefully indicate that the changes set in motion by past rate rises will continue and inflation will move closer to the RBA’s target range of 2 to 3 per cent in the medium-term, leading the RBA to hold off on future cash rate rises.”
Franklin Templeton director of fixed income Andrew Canobi said the outlook for the Australian economy is looking “fairly grim from here” with a series of hikes still making their way into the economy.
"With inflation cooling, wages growth largely consistent with their expectations and evidence mounting that the consumer is retrenching this latest move by the RBA is a surprise,” said Mr Canobi.
“Sadly, it seems the prospects of more to come remains which worries us deeply for the macro-outlook over the next twelve months.”
Mr Canobi said the decision appears to be driven by the minimum wage decision, which was arguably only marginally above expectations.
“The monthly CPI print which follows several monthly undershoots is volatile and not a particularly reliable indicator so ascribing a lot of weight to this recent number, as they appear to have done, is a little surprising,” he stated.
“All we can conclude is that the so-called narrow path is gone.”
Rate rise to add further pressure for businesses
This month’s rate rise will also put businesses under increased pressure which will likely see higher costs for consumers as well, according to CPA Australia.
“Rising wages and higher costs are putting pressure on small businesses. We can’t expect them to absorb all of today’s increase. Businesses will have to pass costs on to consumers,” said CPA Australia business policy manager Gavan Ord.
Mr Ord said the Reserve Bank board was currently walking a fine line to get the economic settings right.
“We want governments to be cognisant of these economic pressures when making spending decisions. We need a holistic approach to managing government budgets and we would encourage policymakers to be considerate of the RBA’s challenges,” said Mr Ord.
With state budgets to be handed down for Queensland, South Australia and the ACT this month, the accounting body is urging all governments to make “reasonable and balances decisions that consider the current economic reality”.
“We want governments to focus on improving business resiliency and dynamism. We want to see measures to counter these issues while not worsening inflation. Governments should consider incentivising small businesses to seek advice from a trusted professional, such as an accountant.”
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