Australia (Commonwealth Union)_ Despite estimating that there is a 75% chance that the US will experience a recession, Konark Saxena, an associate professor at the UNSW Business School, claimed that Australia is more at danger from the US’s high interest rates than from the country’s economic slowdown.
The assistant professor claimed that the real economy should be able to withstand a hypothetical US recession provided “we are able to prevent financial turmoil,” which, in his opinion, will likely befall nations unable to match the high US interest rates.
“High US interest rates will put pressure on countries to either boost domestic interest rates or accept a significantly depreciated currency,” associate professor Saxena said. “Capital follows currencies with comparatively higher interest rates.” He further noted that there are two financial distress concerns that are specifically concerning him with regard to Australia: household financial hardship and currency risk.
“If homeowners are unable to pay their mortgages due to an excessive increase in interest rates by the RBA [Reserve Bank of Australia], household financial distress rises. When the RBA does not raise interest rates enough, the possibility of a currency crisis rises if money leaves Australia for currencies with higher interest rates,” associate professor Saxena said. “It is a difficult position and there is a possibility that eventually RBA would not be able to handle these two clashing impulses,” he cautioned. He suggested that raising labor productivity, pay growth, and wage inflation are some ways to avoid these two extreme outcomes. “If we can control the (nominal) household debt reduction process without encouraging excessive risk-taking, the RBA will have greater room to raise interest rates and bring them in line with US interest rates,” associate professor Saxena remarked.
At its board meeting today, the RBA is anticipated to raise interest rates once more. In light of the higher-than-expected rise in the consumer price index (CPI), some are arguing that a further supersized 50 basis point increase is necessary.
