The Reserve Bank of Australia (RBA) has lifted the cash rate by a further 25 basis points to 2.85 per cent — the seventh consecutive hike since May 2022.
The tightening cycle aims to curb inflation, now tipped to peak at around 8 per cent by the end of the year.
“As is the case in most countries, inflation in Australia is too high,” the RBA noted in a statement following its monthly monetary policy board meeting.
“Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades.”
The central bank has attributed inflationary pressures to “global factors” and the Australian economy’s inability to meet “strong domestic demand”.
“Returning inflation to target requires a more sustainable balance between demand and supply,” the RBA added.
However, according to AMP Capital chief economist Dr Shane Oliver, rates are approaching its saturation point.
Dr Oliver, who is expecting the cash rate to peak at 3.1 per cent, said the economy is already showing signs of slowing, making specific reference to falling property prices.
“I think we are getting to levels that will have quite a significant negative impact on spending in the economy,” he told InvestorDaily.
“We're already seeing a downturn in the housing markets, which is the most intra-sensitive part of the economy, so interest rate hikes are working.
“It always takes a while before it shows up in terms of consumer spending, but there are tentative signs you're hearing about people struggling with their mortgage. The bank credit card data [also] seems to suggest a decline or significant slowing in discretionary spending.”
The latest ANZ-Roy Morgan data also reflects a shift in market sentiment, with consumer confidence dipping a further 1.5 per cent over the past week — the fifth consecutive fall.
Dr Oliver went on to flag risks of a rate-induced financial crisis, pointing to previous recessions triggered by excessive monetary policy tightening from the US Federal Reserve.
“There is a risk out there of a crisis if the Federal Reserve gets too aggressive because as you raise US interest rates, it reduces the supply of US dollars globally and increases debt-servicing costs for those who have US-dollar-denominated debt and that can often lead to financial problems somewhere,” he said.
This, he added, has been the catalyst for “twitchy” investor behaviour off the back of market instability in the UK.
“That response globally to the UK crisis, which just added to mayhem in financial markets, showed how twitchy investors are at present,” he said.
Ultimately, the global economy should avoid a “major calamity” if central banks “keep their head” and “don't over-tighten”.
But in the meantime, Dr Oliver said he expects Europe and the US to “slide into a mild recession”.
