There is a better than fifty-fifty chance Australia could fall into recession due to the Reserve Bank’s aggressive increases in interest rates, economists believe, as a growing group of Labor MPs suggest the seven-year term of RBA governor Philip Lowe should not be extended.

Macroeconomics Advisory chief economist Stephen Anthony said the chance of a recession next year could be as high as 70 per cent due to the impact of the RBA’s high interest rates, coupled with a slowdown in key markets such as China.

The risk of a recession has grown because of the RBA’s rate rises, economists believe, with Labor MPs signalling little support to extend Philip Lowe’s tenure as head of the RBA.Credit:Bloomberg

Pressure on Lowe has intensified after the RBA pushed interest rates to a 10-year high this week and signalling more than one further increase in coming months. Lowe, whose seven-year term ends on September 17, had signalled in late 2021 that rates would remain on hold until 2024.

Within the government, there are now open questions about Lowe’s long-term tenure at the bank.

The previous two governors, Glenn Stevens and Ian Macfarlane, both had their terms extended by three years. But with a sweeping review of the central bank due to be finalised and handed to Treasurer Jim Chalmers in late March, there is a growing expectation that Lowe will not stay on beyond September.

Victorian Labor MP Julian Hill said confidence in both the independence and the judgment of the Reserve Bank governor and board was absolutely critical for Australia’s financial system and economy.

“Fair or not, there has been credible and highly unusual sustained criticism of [bank] judgments in recent times,” he said.

“We can’t hide from reality and these factors I’m sure would be taken into account when considering a response to the review of the Reserve Bank and future leadership appointments.”

Economists, ahead of Tuesday’s quarter percentage point rise in interest rates, had put the chance of a recession in Australia over the next months at less than 30 per cent.

But Anthony, a former Treasury economist, said the chance of recession over the next 12 to 24 months was very high at between 50 and 70 per cent because of the Reserve Bank’s actions.

He said while strong commodity prices would support the economy in the short term, the full impact of the Reserve Bank’s higher interest rates would hit households whose real incomes were falling.

“If we’re going to have a recession, I think it’s going to be in 2024,” he said.

“The impact of higher interest rates on household balance sheets will really be felt next year.”

Lowe this week said the economy is likely to grow around 1.5 per cent this year and next. Unemployment, currently at a near-50-year low of 3.5 per cent, is expected to increase to 4.5 per cent over the next two years.

And despite the lift in official interest rates, inflation is not forecast to get back to the top of the RBA’s 2-3 per cent target band until mid-2025.

IFM Investors chief economist Alex Joiner said Australia’s relatively high population growth rate would help the country avoid recession.

But on a per capita basis, the next 12 to 24 months were going to be tough ones for the economy.

“We might avoid the definition of a recession but for most people it’s going to feel like one,” he said.

“The bank has talked about the narrow path the economy is walking. It’s more like a tightrope now.”

Hill was not the only Labor MP on the record with reservations about Lowe.

Rob Mitchell, Jerome Laxale, Julian Hill and Graham Perrett have all suggested RBA governor Philip Lowe’s seven-year term should not be extended.Credit:Alex Ellinghausen

Queensland Labor MP Graham Perrett said extending Lowe’s term was a matter for the treasurer and his team “but certainly, activist governors carry extra risks”.

“And that might be problematic for the current governor in these super challenging times. He has baggage associated with his comments outside the RBA board meeting notes that he might find hard to put down.”

NSW Labor MP Jerome Laxale criticised the RBA for using “outdated and outmoded data” that did not take into account the impact rate rises had on people who were renting, as landlords were using rate rises to justify rent increases.

“Nearly 50 per cent of NSW [residents] rent, 40 per cent in my electorate. And they’re making these decisions without understanding the impact on [renters],” he said.

There are growing concerns the RBA’s interest rate moves will hurt the housing construction sector.Credit:Paul Rovere

“I would hope that since September to now, the RBA have started that process of measuring the impact of rate rises on the most populous housing tenure in NSW.”

Victorian MP Rob Mitchell said he was already seeing high mortgage stress in his electorate.

“Volunteer organisations are seeing more and more people in mortgage stress and it’s a fine balancing act to try and help people without putting excess pressure on inflation.”

Western Australian senator Louise Pratt said while she understood the need to control inflation, “the RBA needs to get the balance right”.

Victorian Labor MP Josh Burns said that households were feeling the squeeze.

“I’m concerned about the people I represent and their ability to manage financial pressures on their household budgets,” he said.

Assistant Treasurer Stephen Jones told Sky News on Wednesday that “we’re hoping that this, if not the last, it’s nearly the last of the interest rate increases”.

Chalmers would not be drawn on Lowe’s future during an interview on ABC’s RN Breakfast, ducking questions on whether the governor’s term would be extended.

“When it comes to the governor’s reappointment, his term doesn’t conclude until September. In the ordinary course of events, that appointment would be considered closer to the middle of the year. When the time comes, I’ll do the usual consultation with my colleagues and we’ll come to a view,” he said.

The Act governing the Reserve Bank makes it extremely difficult for the treasurer of the day to sack the RBA governor.

The governor has to resign if they become “permanently incapable” of performing duties, become bankrupt or engage in paid employment outside of the bank. A governor, and their deputy, also hold their office “subject to good behaviour”.

Greens’ treasury spokesman Nick McKim, who on Tuesday called on Lowe to resign and for Chalmers to overturn the latest rate increase, said the RBA was hurting the lives of ordinary Australians.

“ Jim Chalmers cannot sit idly by as the RBA drives the economy into recession. The RBA’s insistence on raising interest rates despite clear signs of economic distress is unacceptable,” he said.

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