A major business group fears the economy could be entering a “death spiral” of rising wages growth, inflation and interest rates following the Reserve Bank of Australia’s biggest cash rate hike in more than 20 years.

Lifting the cash rate by 50 basis points to 0.85 per cent after Tuesday’s monthly board meeting, RBA governor Philip Lowe said inflation had to be brought under control.

Westpac, one of the big four banks, was the first to follow the RBA by passing on the 50 basis point increase in full, lifting its variable home loan for new and existing customers on June 21.

“The majority of our customers are ahead on mortgage repayments and have a buffer available to help them manage an interest rate increase,” Westpac consumer and business banking head Chris de Bruin said.

But Ai Group chief executive Innes Willox fears the worst.

“We are now at risk of a wages and inflation and interest rates death spiral,” he told Sky News, noting the upcoming minimum wage decision by the Fair Work Commission.

“We are unfortunately in a period where we are going to see increasing interest rates if we continue to see calls for wage increases that are not sustainable.”

But Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the RBA’s decision was understandable given the inflationary pressures in the economy.

Prime Minister Anthony Albanese said while the rate rise would be a blow for families, it had been foreshadowed by the RBA before the May election.

“But that doesn’t mean that it won’t hurt people,” he told reporters in Darwin on Wednesday.

Finance Minister Katy Gallagher said the government’s October budget would have a “cost of living lens” to help households manage rising interest rates and inflationary pressures.

Shadow treasurer Angus Taylor warned unnecessary government spending would only fuel higher inflation and higher interest rates.

But coalition colleague Matt Canavan said there was no doubt mistakes were made by the previous government in the past year.

“There’s been mistakes made by the government not restraining spending enough,” he told the Nine Network.

His Nationals leader David Littleproud disagrees, pointing to the COVID-19 pandemic.

“You would have seen hundreds of thousands of businesses go into liquidation, and thousands if not millions of Australians being without a job if we hadn’t pump-primed the economy like we did,” he told ABC TV.

Dr Lowe warned inflation was likely to be higher than the central bank had expected just a month ago, and the size and timing of further rate increases would be driven by incoming economic data.

The RBA has expected inflation to hit six per cent by the end of the year, well above its two to three per cent inflation target band.

“It’s headed comfortably above six per cent,” Deloitte Access Economics economist Chris Richardson said.

“Partly given what is happening around gas … but also petrol prices, which have risen again.”

BetaShares chief economist David Bassanese said the RBA’s decision to inflict “shock and awe” on the economy showed it had heeded the lessons of the US where the Federal Reserve waited too long to lift rest rates last year.

He expects four further 25 basis point rate hikes this year, taking the cash rate to 1.85 per cent – well below what financial markets have priced in.

“If the RBA did match market expectations – a 3.2 per cent cash rate by year-end – it would virtually guarantee a substantial economic slowdown, if not recession in 2023,” Mr Bassanese said.

Colin Brinsden and Tess Ikonomou
(Australian Associated Press)