HSBC now rating an Australian recession as a 50:50 chance

The British HSBC bank now regards an Australian recession as a 50:50 chance with the Reserve Bank widely expected to raise interest rates again on Melbourne Cup day to tackle soaring inflation.

Paul Bloxham, HSBC’s chief economist for Australia and New Zealand, said the likelihood of another hike on Tuesday, taking the cash rate to an 18-year high of 4.85 per cent, increased the risk of the economy contracting for two consecutive quarters.

“We expect the RBA to pause after this, as the economy goes into a downswing: we see a recession as a 50:50 chance,” he said.

“Where the RBA had, for a number of years, been prioritising keeping the economy at full employment, instead of focusing on achieving its inflation target, they now appear to have pivoted to prioritising getting inflation down faster.”

Should the worst-case scenario materialise, Australia would sink into the first recession since the first COVID lockdowns in 2020 and the first since 1991 sparked by higher interest rates to tackle persistently high inflation.

A rate rise next week would mark the fifth for 2026, with the Commonwealth Bank and NAB on Wednesday updating their forecasts after new data showed inflation in September hitting 4.3 per cent, the fastest annual pace since March during the first full month of the Iran war.

This occurred after Iran-backed terror groups launched drone strikes on Saudi Arabia’s East-West pipeline.

But even without volatile price items, the trimmed mean underlying inflation pace remained elevated at 3.6 per cent, with higher prices for Australian-made goods and services a bigger driver of higher consumer prices.

Both headline and underlying inflation have been above the Reserve Bank’s 2-3 per cent target for 14 straight months, despite the Reserve Bank raising interest rates 17 times since early 2022.

“The longer inflation is above target, the more likely it is that inflation expectations become unanchored,” Mr Bloxham said.

“Recent public commentary from senior RBA officials supports the idea that the RBA is more concerned about high inflation, is worried about its persistence, and seem to have a stronger proclivity to take policy action to deal with it.”

As recently as August, the RBA was forecasting a 3.6 per cent headline inflation pace, known as the consumer price index.

“Over the past six weeks, the economic data and events show that inflation is tracking higher than had been expected back in August − indeed, ‘materially higher’, as the Deputy Governor, Andrew Hauser, pointed out in recent public remarks,” Mr Bloxham said.

Unemployment last month also rose to a five-year high of 4.7 per cent, with RBA Governor Michele Bullock hinting the jobless rate may have to climb closer to 5 per cent to bring inflation under control.

Mr Bloxham is expecting the jobless rate to hit 5.1 per cent by early 2026, reaching a level last seen in October 2021 when Sydney and Melbourne were in COVID lockdown.

This would also see the simultaneously Reserve Bank fail its dual mandate on keeping inflation within target and having unemployment at a low level without sparking wage rises, a situation known as full employment.

Unlike 2022 and 2023, when the RBA raised rates 13 times from a pandemic record-low of 0.1 per cent, Mr Bloxham said unemployment would rise during this hiking cycle.

“Although the jobs market is showing clearer signs of weakening, and falling housing prices are starting to feed through to stalling growth, we see the RBA prioritising the high inflation challenge and hiking in November,” he said.

“There is unlikely to be a ‘narrow pathway’ this time.”

The futures market regards a November 3 rate hike, half an hour before the Melbourne Cup, as an 80 per cent chance with the big four banks - CBA, NAB, ANZ and Westpac - all predicting an interest rate rise.