‘Landing an A380 on an aircraft carrier’: The RBA’s economic path narrows

The Reserve Bank’s hopes of navigating the economy down a narrow financial path have been likened to landing an A380 on an aircraft carrier, with experts increasingly concerned the country could end up in a recession.

Ahead of Tuesday’s RBA board meeting, with markets putting the chance of another interest rate rise at 50:50, there is growing debate about the bank’s long-discussed “narrow path” that keeps people in work while taming inflation.

The RBA’s narrow path for the economy has been likened to landing an A380 on an aircraft carrier.

Francois Mori

Reserve Bank governor Philip Lowe has referenced this path since last year and as recently as last week.

“We will do what’s necessary to make sure that inflation does not stay too high for too long, and we’re hoping we can tread this narrow path that I’ve been talking about [how] the economy still grows, unemployment rises a bit, but not too much,” he told a Senate parliamentary hearing last Wednesday.

Economists believe the RBA’s narrow path is predominantly a drop in the current inflation rate accompanied by a modest increase in the jobless rate.

EY’s Oceania chief economist, Cherelle Murphy, said the Reserve Bank’s task was becoming increasingly difficult.

“What the Reserve Bank is trying to do is akin to landing an A380 on an aircraft carrier,” she said.

“They must carefully drop demand enough while navigating unpredictable global crosswinds, and a shifting home base, to land inflation in a narrow target of between 2 and 3 per cent. They must do this all while minimising the number of casualties – in this case, those workers whose jobs stand to be lost by the slowing effect of higher interest rates on employers.”

The Australian Bureau of Statistics will release the March quarter national accounts on Wednesday. The Reserve Bank is forecasting the economy to expand by just 1.25 per cent this year.

Most economists are tipping the economy to have grown between 0.2 and 0.3 per cent through the first three months of the year, with household consumption slipping.

EY Oceania chief economist Cherelle Murphy is increasingly fearful about the economy’s future direction.

Alex Ellinghausen

Barrenjoey chief economist Jo Masters said the narrow path was trying to reach the right balance between inflation and overall economic activity.

“It’s raising interest rates just enough to slow the economy just enough to bring inflation back to target with minimal long-term economic scarring,” she said.

“The path is narrowing both as policy is restrictive but also reflecting the nature of price pressures, which are now being driven by sticky (or persistent) services inflation, and weak productivity growth.

“While wage growth remains relatively contained compared to our peers, productivity growth suggests the speed limit may be lower than the long-held rule of thumb that 4 to 5 per cent wage growth is consistent with the inflation target band.”

An interest rate increase on Tuesday would add to the financial pressure facing mortgage holders. On a $600,000 mortgage, monthly repayments have climbed by about $1300 since May last year.

Australia’s “misery” index, which tracks the impact of movements in interest rates, inflation and unemployment, is now at its highest point since the global financial crisis in 2008.

On Monday, Deutsche Bank senior economist Phil O’Donaghoe said he now believed the RBA would take the official cash rate to 4.6 per cent by September in a move that would add another $300 to monthly repayments on a $600,000 loan.

“The economy is withstanding the hiking cycle better than most seemed to think likely. That complicates the RBA’s task of getting inflation back to target from its current intolerably high levels,” he said.

CBA head of Australian economics Gareth Aird believes the Reserve Bank will need to cut interest rates next year.

Louie Douvis

Commonwealth Bank’s head of Australian economics, Gareth Aird, said the narrow path was largely about bringing down inflation while preserving the extraordinary gains in total employment.

“Another way to think about it is that the narrow path is really about getting inflation down without causing a recession,” he said.

“I think we will pull it off in Australia as we don’t have a wages problem and that means we don’t need the unemployment rate to go up much to get inflation down, particularly as spending is slowing a lot. It will require rate cuts in 2024 as well in our view.”

Macroeconomics Advisory managing director Stephen Anthony said a mild recession was still possible for Australia this year, and warned fiscal and monetary policy were working at cross-purposes and there remained no serious structural economic reform agenda.

“A base case is slow growth, probably a somewhat softer labour market and declining inflation,” he said.

AMP Capital chief economist Shane Oliver is increasingly fearful the Reserve Bank could drive the economy into a recession by lifting interest rates too high.

Oliver said the path being traversed by the RBA had “narrowed significantly”.

“The risk is now very high that ongoing inflation and wages concerns will see the RBA over-tighten and knock the economy off the narrow path into recession,” he said.

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