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

Australia's central bank is set to raise interest rates for a fifth time in a bid to combat persistent inflationary pressures, according to major bank economists. This aggressive move could push the cash rate to its highest level since 2008 and contribute to a "sharper, longer slowdown" in the economy. The Reserve Bank of Australia is expected to implement the hike on Tuesday, as escalating concerns over the impact of the Middle East conflict, collapsing house prices, and a more assertive central bank weigh heavily on the outlook.

Belinda Allen, head of Australian economics at CBA, projects real GDP to contract to just 1% by mid-2024, significantly lower than the previously estimated 1.8%. Growth through 2027 is expected to be only slightly better at 1.1%, according to her revised projections. Economists at NAB have also downgraded their forecasts, warning that unemployment could rise above the anticipated levels required to control inflation.

Analysts at NAB anticipate the jobless rate to climb to 5.4% by year-end, as the central bank continues its relentless efforts to tame inflation without sacrificing post-Covid employment gains. The deteriorating economic outlook is compounded by the deepening property slump, which may see home prices plummet by as much as 15% before stabilizing late next year.

Such a correction could have a substantial impact on the economy, as homeowners pull back on spending in response to the declining value of their assets, a phenomenon known as the "wealth effect."