Dire warning for Australian economy as borrowers brace for fifth rate hike
Australia’s biggest bank has issued a bleak warning about the state of the economy as the nation braces for a widely expected fifth interest rate hike of the year on Tuesday afternoon.
In a research paper released on Monday, Commonwealth Bank (CBA) said the Middle East conflict and domestic conditions including high rates and poor productivity are significantly weighing down the economy, and unemployment will rise further than previously expected.
Millions of Aussies are being warned to brace for longer economic pain. Kate Geraghty
The bank’s economists believe growth will fall to just 1 per cent by the middle of next year, almost half of the bank’s previous projection of 1.8 per cent.
The gloomy prediction comes as a fifth interest rate rise of the year looks all but certain, putting more pain on households, although it may help the Aussie dollar rise in value.
The bank said Australia’s economy was “coming under increasing pressure on several fronts”, with more profound problems remaining even as the Reserve Bank of Australia tries to halt inflation by raising interest rates.
“The structural pressures are still acute: continued weak productivity growth, a global AI-induced capex boom putting pressure on interest rates, and supply shocks are keeping inflation higher for longer,” economists Belinda Allen, Ashwin Clarke, Trent Saunders and Harry Ottley wrote on Monday.
They noted household spending still remained high despite inflationary pressures – feeding further inflation – and also said the labour market was weaker than first thought.
“The labour market is also expected to ease by more than previously expected,” they said, noting that business profits had “deteriorated”.
“We now see the unemployment rate increasing to 5.1 per cent compared to our previous peak of 4.8 per cent.”
The report also outlined that data centre construction and chip shortages are adding to inflation, even though AI building activity is helping keep the economy ticking over.
Headline inflation rose to 4.3 per cent in the 12 months to September, more than expected.
CBA said economic weakness would also last longer than expected, with growth not expected to improve to 2.0 per cent until the second half of the 2028 financial year.
If there is a silver lining from the predicted rate rise, it’s that the value of the Aussie dollar could rise.
“We remain directionally bullish on the AUD,” Barclays said on Monday.
“In fact, the RBA could continue to hike even beyond November if the data so requires, notwithstanding market pricing for no more hikes,” it added.
As RBA Governor Michele Bullock has outlined in several press conferences this year, a better exchange rate is one of the ways higher interest rates works to lower inflation, as it makes imports cheaper for Australian consumers.
However, that may be little relief to many Australians, as CBA warned the rate cuts that are widely expected late next year are no certainty.
“Given inflation remains elevated, the rate cuts we have had pencilled in for second half of 2027 remain uncertain,” its economists wrote.
“We leave them pencilled in for August and November 2027 but keep only 50 basis points of cuts despite the higher starting point.”
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