SYDNEY: Reserve Bank of Australia (RBA) chief Philip Lowe’s expectation of further interest rate rises ahead is prompting economists and money markets to narrow the odds of a recession in the US$1.5 trillion (RM6.7 trillion) economy.
There is now a better than one-in-three chance of a slump over the next 12 months, a Bloomberg survey showed, up from one-in-four late last year when Lowe signalled a rate pause was in the offing. In contrast, the likelihood of a recession in the United States has begun to decline.
The reversal comes after the RBA was alarmed by a spike in inflation, prompting a hawkish pivot and traders to price in four more rate hikes.
That’s one more rate increase than is currently expected for the US Federal Reserve (Fed).
The RBA embarked on its tightening cycle in May, two months after the Fed, and then moved at a more cautious pace.
Lowe contended that Australia was distinct from its global peers and that inflation would ease as supply chains disentangled. The RBA’s goal, according to the governor, was to prepare the economy for a soft landing.
But then inflation soared to a 32-year high in the final three months of 2022 as prices were buttressed by strong domestic demand.
Lowe’s message adjusted as he acknowledged Australia had the same challenges as the rest of the world. In February, he raised rates and delivered a hawkish message, surprising markets after the RBA had considered a pause in December.
“The path between containing inflation and recession becomes narrower the longer central banks delay aggressive action against inflation,” said Stephen Miller, a Sydney-based investment strategist at GSFM.
“The RBA’s prevarication through 2022 has meant that the path has become much narrower than necessary.”
The RBA was among the first central banks to downshift to quarter-point hikes in October, a time when the Fed was still moving in 75 basis-point increments.
Australian unemployment was then near a 50-year low and job vacancies were at record highs, and Lowe wanted to preserve some of those gains.
Miller suggested that that might have been a better time to push harder with rate hikes rather than now, when unemployment is rising and the economy has shed jobs in the past two reports.
Expectations for more aggressive RBA action come against a deteriorating backdrop, with consumer sentiment slumping to near recessionary levels.
By contrast, US consumers have proven more resilient despite the Fed hiking rates by 4.25 points compared with the RBA’s 3.25 points.
The confidence surveys are starting to be “confirmed by increasing anecdotes from some of the corporates,” said Andrew Canobi, director of Australian fixed income at Franklin Templeton Investment Australia in Melbourne.
“One example is Domino’s Pizza, which tells us that customers are now switching from having their pizza delivered to saving money by coming and picking it up.” —Bloomberg
