RBA Risks Recession Repeat

Leading economists Shane Oliver and Alan Oster have raised concerns about the Reserve Bank of Australia (RBA) potentially repeating past mistakes and inadvertently triggering a recession.

They argue that the RBA's focus on traditional indicators like unemployment and inflation may cause them to overlook crucial forward-looking indicators such as declining consumer confidence and weakening business orders.

Oliver and Oster draw parallels with the late 1980s, when the RBA raised interest rates substantially, leading to a severe recession. They caution that further interest rate hikes could result in a recurrence of those mistakes.

In contrast, RBA Governor Philip Lowe emphasizes the importance of achieving economic growth and maintaining low inflation. While Oliver anticipates two more rate increases in the near future, he believes that the RBA has already taken sufficient measures to ensure a soft landing for the economy. He highlights notable differences between the present economic landscape and that of the late 1980s, such as higher household debt and lower inflation expectations. Oliver concludes that the RBA's recognition of their misjudgment in 1989 came too late, resulting in an economic downturn.

Both economists express concern about the potential risk of a recession as the RBA continues to raise interest rates. They point to weakening internal spending data, declining retail sales volumes, negative business forward orders, decreasing building approvals, and falling consumer confidence as indicators of an economic slowdown. They believe there is a significant likelihood of a recession occurring and urge the RBA to adopt a more forward-looking approach in their decision-making process.

Source: https://www.afr.com/policy/economy/don-t-overdo-it-on-interest-rates-leading-economists-warn-rba-20230705-p5dlxt