The Reserve Bank of Australia (RBA) has again raised the official interest rate – the sixth rise in as many months – in a bid to curb inflation. But are the rises actually sending the economy hurtling towards recession? Many experts seem to think so.
The RBA today announced a 0.25 per cent increase to 2.6 per cent, marking the sixth consecutive month of rate rises.
It says the rate rises are necessary to combat inflation. If it fails to curb spending, then the price of everything will rise astronomically and the economy will be in ruins – or so we’re told.
But what if, instead of steering Australia towards better economic conditions, the RBA rate rises are in fact making it more likely we’ll enter a recession? And what does that mean for your retirement?
You might think repeated rate rises and a recession affect only workers and mortgage holders and not retirees who own their home.
But an economy-wide recession could have a disastrous effect on retirees, hurting super balances and reducing the value of assets.
How likely is a recession?
National Australia Bank (NAB) chief economist Alan Oster told The Australian people would be wise to “remember 1989”.
That was the last time the RBA raised rates for five consecutive months after not raising them for some time.
Like now, each successive rate rise put more pressure on mortgage holders, but didn’t seem to be fixing the inflation problem.
Then in 1990, the lagging effects of the repeated rises came home to roost and Australia fell into one of the worst recessions in history.
Mr Oster says that much like 1989–90, the effects of the rate increases won’t be felt for a few months at least.
“Do remember `89, when the RBA kept putting up rates and nothing happened until it all fell over,” he says.
“When we look at our [mortgage] book, we can see the consumer has not yet had significant increases in their interest payments. That’s occurring in October and November. That means the next few months will be very important to see how quickly the economy slows.”
What will happen to your super?
When an economy falls into recession, it’s almost inevitable that the stock market will fall as well.
Since so much of your annual super return is based on stock performance, your returns will fall along with the markets.
For example, the start of the pandemic in 2020 saw the average super return in Australia fall into negative territory for the first time since the 2008 financial crisis.
If you were entering retirement then, you were at a distinct disadvantage compared to someone who held off on retirement, even for just a year.
Mark Draper, a financial adviser with GEM Capital Financial Advice, says the key question for investors is whether they should sell everything and move to cash, or stay invested in the markets.
“To some, during periods of market stress, the least risky option appears to be to sell everything and move to cash,” he wrote in the Australian Financial Review.
“History, however, shows a different story for those who sell during a downturn and miss out on the rebound when it occurs.
“The average bear market in Australia declines 29 per cent and lasts 14 months, versus the average bull market rising by 157 per cent and lasting 65 months. For reference, the Australian market last peaked in August 2021.”
Which proves it’s difficult to predict the rise and fall of the markets. For the best result be prepared to rethink your retirement plans if a recession hits.
Are you planning on retiring soon? Does a potential recession worry you? Let us know in the comments section below.