Leading economists warn interest rates could hit a near 15-year high of 4.85 per cent by the end of the year despite concerns the country is headed for a sustained period of economic stagnation.
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Australian National University's RBA Shadow Board, which includes former Reserve Bank board member Warwick McKibbin as well as prominent academic and private sector economists, expects the central bank to raise the official cash rate to 4.35 per cent on Tuesday and hike it to 4.85 per cent over the next six months as it tries to drag inflation down.
The warning came as the Reserve Bank board was meeting on Tuesday to determine whether to raise its cash rate to 4.35 per cent, which would be the 13th increase since May last year.
The last time interest rates were so high was in late 2008 when the RBA was slashing its cash rate in the face of the developing crisis enveloping the global financial system.
The prospect of further rate hikes will do nothing to lift the mood of consumers which has already taken a battering from the succession of 12 rate hikes since May last year.
The ANZ-Roy Morgan Consumer Confidence index dropped 0.8 per cent last week to 74.1 points and its four-week average of 73.5 points is the second weakest reading in the last 30 years.
ANZ senior economist Adelaide Timbrell said the only time confidence has been lower was in the first month of the COVID-19 pandemic.
Business sentiment is also softening. A National Australia Bank survey found businesses became pessimistic about the outlook in May and studies by Judo Bank have identified a similar slide in private sector confidence.
In its latest assessment of the outlook, consultancy KPMG expects growth to slow sharply in the second half of the year and predicts the economy will stagnate in 2024 before staging a soft recovery the following year.
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KPMG chief economist Brendan Rynne forecasts the economy to slow to 1.2 per cent by December, down from 3.7 per cent late last year. It will then expand by just 0.2 per cent in first half of 2024 and shrink by the same amount in second half, Dr Rynne expects.
As a result, the KPMG economist predicts the jobless rate will rise sharply next year to reach 4.8 per cent - 0.4 of a percentage point higher than anticipated by the Reserve Bank.
"This outlook reflects the definition of economic stagnation, with virtually zero growth and rising unemployment," Dr Rynne said.
He called on the government to do more to help bring inflation down.
"In terms of fighting inflation, it seems the RBA is doing most of the heavy lifting, with fiscal policy settings at best neutral or, arguably, unhelpful in reducing aggregate demand," Dr Rynne said.
"Arguably, fiscal policy needs to do more to help bring inflation back to the target band."
His call has been echoed by opposition treasury spokesman Angus Taylor, who accused the government of adding "fuel to the fire" of inflation.
"We shouldn't be relying on the Reserve Bank to do all the work to take pressure off inflation. We need to have every lever of government being pulled to take pressure off inflation. That's not what we're seeing," Mr Taylor said.
He claimed government had spent an extra $185 billion since coming into government and "that's fuel on the fire for inflation ... it's putting the foot on the accelerator at exactly the time when the Reserve Bank is putting the foot on the brake".