Australia’s economy has been running strong despite the rising interest rates, but experts have urged caution as the Reserve Bank’s recent hawkish approach may pose long-term harm for households and commerce. The building and business sectors have warned that the Reserve Bank’s persistent interest rate increases could potentially cause damage in the long run.
Retained optimism
Despite the rise in interest rates, the Australian building and business sectors remain optimistic about the economy. For example, the National President of the Australian Institute of Architects, Shannon Battisson, has not seen any drop in the industry’s performance. Battisson’s architecture firm, The Mill, is based in Canberra and still has a large waitlist for residential work. The end of last year was reportedly very busy for the firm and other architects across the nation.
Despite staff concerns that clients might abandon potential projects due to the increasing interest rates, the firm has not seen any such drop. In fact, their commercially based work across the nation has grown steadily since the first Covid lockdown. Battisson notes that there is momentum across the board, based on the conversations she has had with the institute’s national council.
Building supply giant Boral has also reported a 50% increase in first-half profit in a challenging inflationary environment. This optimistic sentiment, however, is not shared by all. The building sector continues to be a hotspot of commercial failures as companies face difficulties finding workers and dealing with skyrocketing costs for materials such as cement and steel.
Strong domestic demand
These are examples of what Reserve Bank of Australia (RBA) Governor Philip Lowe referred to as “strong domestic demand” stoking inflationary pressures. Due to this strength, the RBA expects that “further increases in interest rates will be needed over the months ahead” to curb these pressures. Underlying inflation, which strips out the more volatile changes, reached a record annual clip of 6.9% in the December quarter, well outside the RBA’s target range of 2%-3%.
Experts, such as Timo Henckel, a professor at the Australian National University and a member of a “shadow RBA board”, have warned that the central bank’s hawkish approach may result in rates being jacked up too high. Henckel notes that the RBA is trying to avoid being overly “dove-ish” like they were a year ago, when they were slow to start lifting rates. The uncertainties of monetary policy, including the responsiveness of the economy to higher interest rates, mean that the RBA could potentially go too far. Some researchers believe that interest-rate impacts will be felt more intensely and for longer than in the past.
Australia’s financial landscape may also make the economy particularly sensitive. Approximately 800,000 mortgages will soon move from fixed rates of about 2% to more than double that this year as loan periods expire, joining the 85% of borrowers already on those variable and rising rates. Henckel also notes that there is a much higher level of household debt in Australia compared to most other countries, which adds to the sensitivity.
Denita Wawn, CEO of Master Builders Australia, has noted that demand for builders is showing signs of decline due to the strong increase in interest rates. Wawn acknowledges that the Reserve Bank faces a challenging task in finding the right balance between curbing inflation and maintaining demand for building and construction. Master Builders forecasts that new-home building activity will decline in the short-term before rebounding by 2026-27 when inbound migration recovers, creating more demand and alleviating some of the industry’s “labour challenges”. The Master Builders, like the architects in Battisson’s firm, believe that government spending will support demand for building and construction.