Watch out for harsh Aussie recession: Bentham
Australia is likely to experience a recession worse than US if the pace of interest rate rises continues, according to Bentham.
Speaking at a roundtable, Bentham chief investment officer, Richard Quin, said the current rate of high inflation had not been as transitory as people had initially expected and he expected them to peak at 7% in Australia.
When it came to recession, he said it was commonly-found that Australia and the US had opposing reactions but, in this instance, it would be that Australia would fare worse. This was particularly the case as Australia had avoided a significant recession during the Global Financial Crisis unlike the US.
“A recession in Australia would be harsher than other countries because we are 10 times more sensitive to interest rate rises. Rate rises will really smack disposable income in Australia.
“People are pricing in a recession now and it is becoming harder and harder to avoid the more rate rises there are.”
There had been two consecutive rate rises in May and June so far this year, one 25 basis points raise and one 50bps raise which was the highest raise since February 2000.
In its latest minutes, Reserve Bank of Australia (RBA) governor, Phil Lowe, said the decision had been taken to raise by 50bps as rates were still low in an economy with a tight labour market and that there was a heightened risk of persistently-high inflation.
Quin agreed the pace of rate rises was not close to ending yet.
“There are still a lot of rate hikes in the system, there could be as many as 12 25bps rises by the end of the year which would bring rates to 4%. If it gets to that, you will be happy to get a lump of coal for Christmas, it would be brutal.
“I can’t see that happening but if the Aussie dollar falls over then the central bank might not have a choice.”
AUTHOR
Laura Dew
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