80 per cent chance of recession: RBA

RBA PREVIEW
The unreleased modelling suggested Australia had a recession risk of up to 80 per cent, according to some models. Picture: NCA NewsWire / Gaye Gerard

Unreleased modelling from the Reserve Bank suggested there was a one-in-two chance of Australia avoiding a recession, with another scenario placing that risk as high as 65 to 80 per cent.

In an email written by an RBA analyst sent in September 2022, and released under freedom of information laws, they calculated Australia’s risk of recession as a result of interest rate rises.

“Like peer countries, Australia is in the midst of a historically rapid monetary policy tightening cycle in response to high inflation,” they wrote.

“Stochastic simulations using the MARTIN model and the August SMP forecasts

suggest that there is a one in two chance Australia ends up on the ‘narrow path’ – where inflation returns to target without requiring a recession.

“In contrast, a probit model that incorporates longer‐run historical data estimates recession risk to be much higher, at 65 to 80 per cent.”

RBA PREVIEW
The unreleased modelling suggested Australia had a recession risk of up to 80 per cent, according to some models. Picture: NCA NewsWire / Gaye Gerard

The internal modelling used cash rates that peaked at 4.8 per cent as a means to return inflation to the RBA’s target of 2 to 3 per cent by the end of 2024 while not risking a spike in unemployment rates.

The modelling was done with three speeds: a steady climb (25 basis points rise each month before hitting 4.8 per cent in August 2023), front-loaded (50 basis point increases to hit 3.8 per cent in may 2023) and flat (maintaining the cash rate at 3.35 until mid-2024).

In one email, an economist says “a more aggressive path achieving within‐target inflation by end 2024 causes a Sahm recession”.

Although RBA governor Philip Lowe has flagged reducing inflation as his top priority, the May statement on monetary policy forecasts a return to the target range by mid-2025.

“Inflation is expected to return to the 2-3 per cent target range, but it will take some

time,” it read.

“The central forecast is for headline inflation to decline to 4.5 per cent by the end of

2023 and to reach 3 per cent by mid-2025.”

RBA REPORT MEDIA BRIEFING
RBA governor Philip Lowe has increased Australia’s cash rate from 0.35 per cent to 3.85 per cent. Picture: NCA NewsWire / Nikki Short

Most recently raising Australia’s cash rate by 25 basis points to 3.85 per cent in May, Dr Lowe flagged a “further tightening of monetary policy may be required”.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” he said.

While the economic forecast for Australia does indicate a slowdown in line with global trends, predictions largely suggest a recession will not occur in Australia.

“A slowing global economy matters to us a great deal, and we do expect their own economy to slow considerably. The Treasury and the Reserve Bank are not currently expecting a recession here at home,” Dr Chalmers told ABC’s Radio National in April.