The Australian economy may likely experience a recession as its monetary policy is on course to undergo its harshest tightening in a while. This reduces the sales of lands and properties, as citizens significantly reduce their expenditures.
Almost all 23 economists polled believe the Reserve Bank of Australia will raise its benchmark interest rate by 50 basis points this week, to 1.85 percent, for the third time in three months. Thus, the total tightening since May has been 175 bps. This is the highest increase in bps in half a year since 1994.
According to Andrew Ticehurst of Nomura Holdings Inc, the RBA lags. He thinks a country with core inflation running at an average of 6 percent annually and a very low unemployment rate should not use its present cash rate of 3–3.5%. This will only increase loan repayment and push expenditures, which comprise around 60% of the economy’s production.
The RBA’s inflation goal range of 2-3 percent is being exceeded, and policymakers are trying to curtail it. Because of the money reserved during COVID-19 and the fact that there is only a 3.5% unemployment rate, they contend that households can withstand future rises in rates.
Household Spending Rates Take a Nosedive
Since most borrowers have variable-rate loans, RBA rate rises are promptly passed on to them. Retail sales increased at the slowest rate this year in June, according to data released last week, indicating that demand is beginning to soften.
Private information from Australia’s Commonwealth Bank, the biggest lender in the country and one that records the use of credit and debit cards revealed a “marked softening” in expenditures in July.
Gareth Aird from the CBA says there is a real possibility that household spending could decline by the year’s end. He claims they anticipate a substantial slowdown in the forward-looking economic indicators.
Consumer confidence has been dampened by declining house values, closely related to wealth measurements. PropTrack, a real estate business, predicts that prices will decrease by 15% from present levels by next year after increasing at an “extraordinary speed” from 2020 till now. A rate reduction is predicted to begin by 2023. A quarterly update of projections from the RBA is expected later this week.
The Australian Dollar might take a hit and drop again due to the rate reduction next year.
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