The Reserve Bank of Australia’s “narrow path” approach to taming inflation while minimising damage throughout the economy was “not the right strategy” as the central bank faces a “disaster scenario”.
That is the wake up call a leading economist has delivered the central bank ahead of its meeting next week, where it is almost guaranteed to hold the cash rate at 3.6 per cent after inflation jumped above expectations in October.
Inflation is now well outside the RBA’s two to three per cent target band and some economists are predicting the central bank will be forced to hike rates again.
EQ Economics managing director Warren Hogan is amongst those and said inflation’s jump to 3.8 per cent showed the economy was at capacity.
“As we saw last week, (we’re) creating inflation that is now not only running above the RBA’s target, but looks to be picking up and moving away from it,” he told Business Now.
“This is the disaster scenario for the RBA, who had hoped for this narrow path and I think last week we got evidence that the narrow path was not the right strategy.”
Former RBA governor Philip Lowe in June 2023, when the central bank was in the midst of a series of rate hikes, laid out his plan for the “narrow path”.
“That path is one where inflation returns to target within a reasonable timeframe, while the economy continues to grow and we hold on to as many of the gains in the labour market as we can,” Mr Lowe told attendees at the Morgan Stanley 5th Australia Summit.
“It is still possible to navigate this path and our ambition is to do so, but it is a narrow path and likely to be a bumpy one with risks on both sides.”
The RBA did not hike interest rates as early or as aggressively as other nations dealing with surging post-pandemic inflation.
It subsequently took longer for Australia to get inflation back into the two to three per cent target band than other nations, although the nation’s unemployment rate stayed low throughout this time.
Mr Hogan’s criticism of the narrow path comes ahead of GDP figures due to be released by the Australian Bureau of Statistics on Wednesday.
The economist said the Australian economy was “at capacity” due to lacklustre productivity and any rise in GDP could be inflationary.
“Whether it’s the government trying to hire workers or private enterprise trying to get construction happening… there is competition which is putting upward pressure on prices,” Mr Hogan said.
“This is happening because we have little productivity in our economy and that productivity needs to be based on private sector investment.”
GDP rose 1.8 per cent over the 12 months to June 2025 and lifted 0.6 per cent in that quarter.