‘Sharper, longer slowdown’ predicted for economy as fifth interest rate hike looms

The cash rate is the Reserve Bank’s main policy interest rate. A fifth increase would lift it to its highest point since 2008, according to the article. The RBA is expected to act because inflation remains persistent and officials want to bring price growth back under control. The decision matters because the cash rate influences many other interest rates.

For people with mortgages, a higher cash rate usually means lenders raise variable mortgage rates. Borrowers then pay more interest, leaving less money for groceries, services and other spending. Households refinancing or taking new loans can also face higher costs. The article says unions protested against the anticipated increase, while economists warned that further hikes could weaken the economy.

The expected hike comes as growth forecasts are being cut and recession risks are rising. Higher repayments could add to pressure from falling house prices and expensive oil. The RBA therefore faces a difficult balance: reducing inflation without causing an unnecessarily deep slowdown or large employment losses.

The downgraded forecasts point to a much weaker Australian economy. CBA expects real GDP growth to fall to just 1% by the middle of next year, down from its earlier 1.8% estimate. It sees growth at only 1.1% through 2027. NAB also forecasts about 1% growth next year and below-trend growth during 2027 and 2028.

The labour market is expected to weaken as demand slows. NAB’s Gareth Spence says unemployment may need to rise from 4.7% to as high as 5.4% by the end of next year. CBA is more optimistic, forecasting a peak of 5.1%. These figures show how much employment could suffer as the RBA keeps fighting inflation.

The forecasts suggest the slowdown may be sharper and longer than previously expected. Falling property prices, expensive oil and higher interest rates are combining to reduce economic momentum. The article says the RBA’s aim of controlling inflation while preserving post-Covid employment gains now looks unlikely to be achieved.

Inflation is a broad increase in the prices of goods and services over time. When inflation stays high, money buys less than it did before. That matters for households, businesses and the wider economy. The article describes Australia’s inflation pressures as persistent, so the RBA is trying to regain control rather than allow rapid price increases to continue.

Higher interest rates work mainly by reducing borrowing and spending. Mortgage repayments rise, households have less disposable income, and businesses face greater financing costs. Weaker demand can make it harder for companies to keep raising prices. In Australia, the RBA is expected to deliver a fifth hike, pushing the cash rate to its highest level since 2008.

This policy has a cost. Slower spending can reduce business sales, hiring and investment. The article reports that major banks now expect weaker growth and higher unemployment. The RBA’s challenge is to lower inflation without tipping the economy into recession or undoing post-Covid employment gains.

Oil is a major input for transport, production and many business activities. When its price rises sharply, companies face higher operating costs, while households pay more for fuel and related goods. If those increases spread through the economy, inflation can remain high. That makes the RBA less able to reduce interest rates quickly.

The article gives a clear example: Brent crude climbed from about $US72 a barrel in early July to above $US110 in recent days. Belinda Allen linked the weaker outlook mainly to oil being much higher than expected. She had expected signs of recovery by the New Year, but now sees the economy bottoming deeper and later.

Higher oil prices therefore create a squeeze. They lift living and business costs while higher interest rates reduce spending. The conflict’s length has also undermined hopes for a near-term peace deal. The result could be a sharper, longer slowdown, with growth forecast near 1% and recession risks rising.

The wealth effect describes how changes in household wealth influence spending. When home values fall, owners may feel less financially secure and become more cautious. They may delay renovations, major purchases, travel or other discretionary spending. This reaction can weaken economic demand even when household incomes have not immediately changed.

The article says Shane Oliver expects home prices could fall as much as 15% before levelling off late next year. Sydney property values were already 10% below their recent peak. Drawing on RBA research, Oliver says a correction of that size could deliver a substantial economic hit as worried homeowners pull back on spending.

The mechanism can reinforce the slowdown. Reduced household spending lowers sales for businesses, which can weaken investment and hiring. Falling prices may also affect confidence and homebuilding. Oliver does not make contraction his base case, but he warns recession risk is significant and rising, reaching as high as 45% if the RBA hikes as expected.

Homebuilding depends on the strength of the property market. When prices fall and buyers become cautious, developers may delay projects or reduce the number of homes they plan to build. Lower construction activity means less work for builders, tradespeople and suppliers. It also reduces the economic activity created by new housing projects.

The article directly links the weakening property market to homebuilding. Shane Oliver says falling prices will weigh on construction, adding to the economy’s multiplying pressures. The process can begin with weaker confidence and lower expected returns, then spread through fewer building approvals, projects and construction jobs. Those effects can be especially damaging while households are already cutting spending.

Less homebuilding would reinforce the broader slowdown. Construction workers and related businesses may see reduced income, while unemployment could rise if labour demand weakens. The article does not give a separate construction-job forecast, but major bank economists already expect unemployment to reach between 5.1% and 5.4% by the end of next year.

Central banks use interest rates to influence economic demand. When the RBA raises its cash rate, banks generally increase borrowing costs. Households with variable mortgages have less money to spend, while businesses face more expensive loans and may delay investment. These changes reduce demand across the economy, helping ease pressure on prices and inflation.

The effects spread beyond borrowers. Lower sales can lead businesses to reduce hiring, hours or expansion plans. Weaker demand can slow wages and investment, while falling house prices may further reduce household confidence. The article shows this chain clearly: higher rates, a property slump and expensive oil are all contributing to weaker forecasts and rising recession concerns.

The policy trade-off is difficult. Keeping rates high may help the RBA bring inflation back under control, but it can also produce slower growth and higher unemployment. NAB expects unemployment could reach 5.4%, while CBA forecasts 5.1%. The article says the RBA’s post-Covid employment strategy now looks unlikely to succeed fully.