The RBA is risking a recession by raising interest rates but feels there's nothing else it can do

The Reserve Bank of Australia (RBA) has raised interest rates to 4.35%, its post-COVID high, despite downgraded growth forecasts and rising inflation. The RBA is trying to balance keeping inflation expectations in check while avoiding a recession. Under its baseline scenario, economic growth is expected to bottom out at 1.3% for the year to December and remain at that level through June 2027. Unemployment is expected to peak around 4.7%, up from 4.3% currently. However, under adverse scenarios where the Strait of Hormuz remains closed, the risk of recession increases, with economic growth potentially falling below 0.5% and unemployment above 5%. The RBA's forecasts assume the fuel excise cut will end in July, and that rising fuel costs are not significantly lowering demand. Most households and businesses are not yet showing signs of severe financial stress, but are becoming increasingly worried.