Treasurer Jim Chalmers says a recession in Australia is not on his list of worries, even as a major business group expressed fears the economy could be entering a “death spiral”.

Such views came after the Reserve Bank of Australia raised the cash rate by 50 basis points to 0.85 per cent at Tuesday’s board meeting, and warned further increases can be expected in the fight against inflation.

Dr Chalmers agreed inflation is a major challenge, but he did not believe the economy faces the risk of a recession trying to curb it.

“That’s not on my list of fears for our domestic economy,” he told a conference hosted by Sky News and The Australian.

“I genuinely believe that we have, certainly in the medium term, more opportunities than challenges, but the challenges we have right now are incredibly serious and incredibly significant.”

Business Council of Australia chief executive Jennifer Westacott also told the conference she did not believe Australia faces another recession.

But Ai Group chief executive Innes Willox is not so optimistic.

“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.”

Of the big four banks so far only Westpac and CBA have followed the RBA, passing on the 50 basis point increase in full.

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.

Treasury Secretary Steven Kennedy told an Australian Business Economists lunch inflation is likely to rise “potentially well above six per cent and remain there for the rest of this year”.

National Australia Bank chief economist Alan Oster expects Tuesday’s 50 basis point rise is unlikely to be a one-off, given the RBA has signalled it wants to withdraw its extraordinary support seen during the pandemic.

“We expect additional 50 basis-point rises in July and August to take the target to 1.85 per cent, with a further 25 basis-point November rise to 2.10 per cent by year-end,” he said.

Colin Brinsden and Tess Ikonomou
(Australian Associated Press)