Excessive interest rate hikes could push Australia into recession

Excessive interest rate hikes could push Australia into recession | Insurance Business Australia

Excessive interest rate hikes could push Australia into recession

Joseph Stiglitz, a Nobel Prize-winning economist and public policy analyst, has warned that excessive interest rate rises could push Australia into recession.

Stiglitz's warning follows Treasurer of Australia Jim Chalmers's statement on Monday, ruling out a windfall profits tax despite thinktank Australia Institute's latest report that rising profits are driving inflation.

In a statement reported by The Guardian, Stiglitz slammed the Treasurer's statement, arguing that introducing a windfall profits tax is a “no brainer” as companies made “huge windfall profits” during the COVID-19 pandemic and the Russia/Ukraine conflict increased energy prices.

“It makes a great deal of sense at this current juncture – it's not as if the energy companies did anything to deserve it,” Stiglitz said, as reported by The Guardian. “It was [Vladimir] Putin who engaged in that reckless action. Why should the energy companies be rewarded?”

Stiglitz further explained that the windfall profits tax will prevent companies from monopolising power and increasing prices. Additionally, the tax will prevent largely foreign-owned resource companies from extracting money from Australia.

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Central banks across the globe, including the Reserve Bank of Australia (RBA), have increased interest rates to crush the inflation surge. According to Bloomberg, Australian policymakers have hiked by 125 basis points to 1.35% as economists predict another 50 basis-point increase in August.

Stiglitz commented that allowing workers' wages to fall behind the increase in prices is a mistake because “wages are not really the source of the inflation” in Australia, while dropping wages will “exacerbate” inequality.

He added: “What Australia has to be sensitive to is that there is a significant risk that Europe and the United States will go too far, and there will be a global downturn.”