New treasurer Jim Chalmers has warned that rising interest rates will impact economic growth prospects as the Reserve Bank of Australia tries to curb rising inflation.
The central bank has made it clear that interest rates will rise further next year after raising the spot rate for the first time in more than a decade earlier this month.
“The Reserve Bank has rightly been very candid about the interest rate path because we have skyrocketing inflation, which is expected to get worse before it gets better,” said Dr. Chalmers to reporters in Canberra after talks with RBA Governor Philip Lowe earlier in the day.
“Obviously they will have an impact on the economy.”
However, RBA Assistant Governor for Economics Luci Ellis has declined to speculate how high spot interest rates could go, especially at a time when the country and the global economy are dealing with unusually volatile conditions.
She said inflation has risen around the world, Australia has a very tight labor market, but at the same time real wages are falling.
In addition, Ukraine and Russia remain at war and parts of China are locked in due to COVID-19, leading to supply disruptions.
“To make a prediction in light of so many events just seems inappropriate,” said Dr Ellis in response to a question following her address to the Urban Development Institute of Australia’s national conference.
“The board has already said there is more, but we will monitor the data and evidence very carefully and figure out what the appropriate action is.”
Economists expect the RBA to raise cash rates by 25 to 50 basis points at its June 7 board meeting, following the hike earlier this month, the first increase in more than a decade.
That’s despite new data showing construction activity remained weak in the March quarter, placing downside risks to economists’ already flimsy growth forecasts when the quarterly national accounts are released on June 1.
The Australian Bureau of Statistics said total construction fell 0.9 percent to $53.7 billion in the March quarter.
Economists had expected a 0.9 percent increase in the quarter after a dip in the previous quarter.
The ABS said construction activity fell 1.3 percent to $30.1 billion in the March quarter, with residential construction down 0.9 percent and non-residential construction down 1.8 percent.
Tech work also fell 0.4 percent to $23.6 billion.
dr. Ellis said there are signs that the housing industry is booming and can’t finish the pipeline of work any faster.
She said this had nothing to do with the availability of land or the governments approving enough houses.
“We hear from liaison contacts in the construction industry that delays are common,” said Dr. ellis.
“Normally it takes about six months to build a detached house. At the moment they tell us it takes about nine months on average.”
Some of these delays relate to supply chain disruptions around the world affecting a range of building materials, especially steel and wood, as well as everything from tiles to appliances.
“Manpower availability is also an issue, especially in Western Australia, but this is not specific to construction,” she said.
dr. Ellis expects the short-term replenishment of demand from initiatives such as HomeBuilder and other temporary support measures will work out of the pipeline.
“As interest rates rise, the demand momentum from the current low interest rates will also diminish and the shifts in demand resulting from the pandemic will have made their way,” she said.
Australian Associated Press