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Business warns of economic 'death spiral'

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A major business group fears the economy could be entering a “death spiral” of rising wages growth, inflation and interest rates following the Reserve Bank’s biggest cash rate hike in more than 20 years.

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The central bank yesterday jacked up the cash rate by 50 basis points to 0.85 per cent, which was more than most economists had expected, after Tuesday’s monthly board meeting.

RBA Governor Philip Lowe said inflation had to be brought under control.

Westpac, one of the big four banks, was the first to follow the RBA by passing on the 50 basis point increase in full, lifting its variable home loan for new and existing customers on June 21.

“The majority of our customers are ahead on mortgage repayments and have a buffer available to help them manage an interest rate increase,” Westpac Consumer and Business Banking head Chris de Bruin said.

But Ai Group chief executive Innes Willox fears the worst.

“We are now at risk of a wages and inflation and interest rates death spiral,” he said on Wednesday, noting the upcoming minimum wage decision by the Fair Work Commission.

“We are unfortunately in a period where we are going to see increasing interest rates if we continue to see calls for wage increases that are not sustainable.”

However, Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the RBA’s decision was understandable given the inflationary pressures in the economy.

“Inflation is hitting businesses especially hard, particularly surging energy prices,” he said.

Finance Minister Katy Gallagher said the government’s October budget would have a “cost of living lens” to help households manage rising interest rates and inflationary pressures.

“We understand that households … are under enormous pressure,” she said.

“It’s a real set of challenging circumstances facing the economy.”

Shadow treasurer Angus Taylor warned unnecessary government spending would only fuel higher inflation and higher interest rates.

But one of his own coalition Senate backbenchers Matt Canavan said there was no doubt mistakes were made by the previous government in the past year.

“There’s been mistakes made by the government not restraining spending enough,” he said.

Dr Lowe warned inflation was likely to be higher than the central bank had expected just a month ago, and the size and timing of further rate increases would be driven by incoming economic data.

Inflation spiked to 5.1 per cent in the March quarter.

The RBA expects inflation to hit six per cent by the end of the year, which would be well above its two to three per cent inflation target band.

“It’s headed comfortably above six per cent,” Deloitte Access Economics economist Chris Richardson said.

“Partly given what is happening around gas … but also petrol prices, which have risen again.”

-AAP

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