The economy is overheating, and mortgage holders brace for a shock. Economists warn that demand is outpacing supply, leading to higher inflation and potential rate hikes. Commonwealth Bank predicts a surge in the Australian economy, forecasting a 1% growth in the final quarter of 2025 and a robust 2.7% for the year. However, this rapid rebound has created challenges, as the economy is growing a little too quickly for comfort.
Economist Harry Ottley highlights the supply capacity issue, with household spending up 0.7%, business investment up 0.3%, and government spending at 0.9%. This strong rebound has caught many by surprise, but it's causing capacity constraints. The national economy is now growing at 2.7%, with the Reserve Bank of Australia predicting anything above 2% would fuel inflation. Commonwealth Bank's supply constraint estimate is closer to 2.1%.
Ben Udy, Oxford Economics Australia's lead economist, notes the demand surge over the last six months, leading to higher prices. The RBA is reacting to this by trying to slow demand while supply catches up. Udy believes interest rates are too low and predicts one more rate hike in May, with further hikes possible if the economy remains strong.
RBA governor Michele Bullock warns households not to rule out a March interest rate hike, emphasizing the need for a live meeting. She highlights the tight inflation and unemployment figures, indicating a potential for quicker rate adjustments. The headline inflation rate of 3.8% and the trimmed mean inflation rate of 3.4% are both above the RBA's target band of 2-3%. Bullock defends the February interest rate hike as the least worst option for long-term households, citing the risk of prolonged inflation above target.
