RBA modelling reveals huge cost of lifting rates more aggressively

The economists found the front-loaded and steady plans would bring inflation, currently 7 per cent, back below 3 per cent by late 2024.

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But there would be a cost to the economy under both those scenarios, with the analysis showing the jobless rate climbing to 4.5 per cent in the second half of next year. That would equate to almost 200,000 people losing work over the next 12 to 18 months.

Unemployment would continue to climb slightly to about 4.75 per cent by 2026.

A flat path of rate rises keeps the jobless rate under 4.5 per cent and inflation above 3 per cent until the second half of 2025.

Some critics of this week’s federal budget, which contained a net $12 billion in extra spending in 2023-24, have warned it could force the Reserve Bank to lift interest rates or keep them higher for longer.

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But Treasurer Jim Chalmers on Thursday revealed he had outlined his fiscal plan to RBA governor Philip Lowe before its release this week.

“I do speak to the governor about my policies, about my budgets, and the fiscal stance of the government. I do that in advance of releasing the budget and I do it after releasing the budget,” he said.

Lowe has repeatedly said the Australian economy is on a “narrow path”. This month, after the bank increased interest rates, he said the path to achieving a soft economic landing remained a “narrow one”.

Separate internal RBA analysis, completed in September when the cash rate was increased to 2.35 per cent, looked at the chance of a recession caused by an aggressive tightening of monetary policy.

It found the risk could be as high as 80 per cent based on a simple economic model. Using the RBA’s own economic model, the chance fell to one in two of achieving a “narrow path” of inflation falling to the bank’s target without a recession.

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