Interest rates normalising at risky time for economy

“Today we have seen a significant step in the normalisation of monetary policy including the movement of interest rates away from the setting put in place to maintain the health of the economy during the COVID-19 pandemic,” Innes Willox, Chief Executive of the national employer association Ai Group said today.

“The RBA foreshadowed further rate rises in the period ahead and care will need to be taken to ensure rate rises do not go too far and slow the economy too much. While the RBA anticipates that inflation will return to the target band, this will depend to a significant extent on the degree to which wage rises entrench further inflationary pressures.

“Some sustainable adjustments in wages are clearly warranted especially where productivity trade-offs can be achieved. However, for many businesses excessive wage adjustments would add to the risk of significantly slower growth in domestic activity at a time when they are still recovering the ground lost during two plus years of COVID-related disruptions.

“For the majority of businesses the decision will not have been a surprise and higher rates will have been well and truly factored into their borrowing and investment decisions. However, added cost pressures do carry the further risk that demand will slow and inflation expectations will rise.

“Australia is benefiting from a very healthy labour market with low unemployment and a rapid rise in full-time employment – particularly for women. These factors are clearly helping household budgets in the face of current price pressures, and we should be wary of pushing up inflation and bringing the progress that is being made in these areas to a premature end,” Mr Willox said.

/Public Release. This material from the originating organization/author(s) may be of a point-in-time nature, edited for clarity, style and length. The views and opinions expressed are those of the author(s).View in full here.