Australian mortgage-holders are being warned that the era of cheap credit is gone for good, with interest rates set to remain permanently higher in a post-Covid world. In a sobering assessment for households, Oxford Economics chief global economist Ryan Sweet has cautioned that persistent economic shocks will lead to higher interest rates than previously anticipated.
Three shocks driving inflation
Sweet points to three economic shocks in the last five years – conflicts in Europe, the Middle East and tariffs – which have all contributed to lifting inflation. “Unfortunately, one of our assumptions has been that since the pandemic we are in a world of more frequent and adverse supply shocks,” he told NewsWire. “This means inflation will be higher relative to what we saw pre-pandemic and with that interest rates will also be higher.” Sweet said these shocks have become more frequent, ruling out a long history of rate cutting.
Interest rate trajectory since the GFC
Since the Global Financial Crisis that hit Australia in 2008, interest rates have trended down from 7.50 per cent to an emergency low of 0.10 per cent during the Covid-19 pandemic. In a post-Covid world, interest rates have reversed course and jumped back to 4.35 per cent, in part due to various supply shocks. Despite pointing out that interest rates will permanently be higher than they otherwise would be due to these shocks, Sweet forecasts rates will be left on hold for the remainder of the year, before a gradual easing in 2027. “I think they are going to sit tight. Just like many central banks, they are in a tough spot but they have managed this reasonably well,” he said. “The Australian economy will slow in the second half of the year due to the supply impacts of what is happening in the Middle East. This will impact the labour market, business investment and inflation.”
RBA rate hikes and inflation data
The Reserve Bank has so far lifted the cash rate by 25 basis points in February, March and May as it looks to curb runaway inflation. Official figures released by the Australian Bureau of Statistics (ABS) reveal yearly headline inflation fell from 4.6 per cent in March to 4.2 per cent in April. This is due to a temporary halving of the fuel excise and reduction of GST windfalls, taking about 32 cents a litre off the price of fuel. But the all-important trimmed mean inflation rate – which strips out volatile items including fuel – rose to 3.4 per cent for the 12 months to April, showing underlying price pressures are still in the Australian economy. Both numbers are still well above the RBA’s target of inflation, which sits between 2-3 per cent.
Australia’s unique vulnerability
While Australia’s inflation rate rises, Sweet notes the country is in a unique spot compared with the rest of the world, with small changes in the cash rate having a big impact on the economy due to the bulk of households being on variable mortgages. “Monetary policy packs a much bigger punch in Australia than it does in say the United States,” he said. “You can see it in consumer confidence, once interest rates start to go up you get that panic, and on top of everything you have higher energy prices (which also hurt household spending).”
“Gut punch, but not a knockout”
Australia’s inflation rate has reached a three-year high due to surging oil prices flowing through the economy, but Sweet predicts it will not be a repeat of the 1970s. Economically, the 1970s is widely characterised as being a lost decade, due to living standards being smashed by rampant stagflation and an energy crisis caused by higher oil prices. Fast-forward to 2026 and oil prices have suddenly spiked - much like they did five decades earlier. Before the Middle East conflict in January, oil prices were about $US56 ($A80) per barrel, before temporarily touching $US120 ($A167) per barrel, its highest price since mid 2022. This was due to the critical Strait of Hormuz – which had around 20 per cent of the world’s oil and gas flowing through – shutting down in response to the war in the Middle East.
“(Surging oil prices) won’t be as impressive, inspirational as the 1970s because the global economy is completely different today,” he said. “Let’s pick on the US economy as an example, it is much more services based, with the share of consumer spending that goes towards energy at low single digits and it has been falling for the decade.” “That doesn’t mean it won’t hurt, but it is more of a gut punch than a knockout blow today.” He says the definition of stagflation – which is the worst possible outcome for an economy as it combines slowing growth, higher unemployment and rising prices – is now outdated, as we won’t go back to the 1970s. “Central Banks didn’t appreciate the importance of keeping inflation expectations anchored in the 1970s and 1980s,” he said. “That is how you got stagflation, inflation expectations went through the room and people expected to be paid more.” “Today, inflation expectations are more anchored.”
Growth slows, but not a disaster
Higher interest rates and the Middle East conflict have combined to slow the Australian economy. Australian Bureau of Statistics figures show the national economy grew by 0.3 per cent over the quarter to March 2026. While the economic pie grew for the first three quarters, the pace of growth took a hit, with the March quarter coming in much weaker than the 0.9 per cent recorded in December. Overall yearly growth is now at 2.5 per cent. Productivity, which measures GDP divided by the number of hours worked, declined 0.6 per cent. Sweet said while the Australian economy is slowing, it is around expectations. “GDP is inherently going to bounce all over the place quarter to quarter but for the year, you’re looking at growth of 2 to 2.5 per cent,” he said. “It is not a disaster, but it’s not amazing. The Australian economy just can’t grow as quickly as it used to partly because productivity growth has been moving sideways since 2020.” “That is what is going to differentiate global economies over the next several years between those who see higher productivity growth and those that don’t.”
HSBC economist warns of possible recession
HSBC chief economist Paul Bloxham warns Wednesday’s data showed the pressure already on the economy before the full impacts of interest rate hikes and the US/Israel and Iran war hit. “Our take is the economy has been subjected to a number of negative shocks, the effect of which has mostly arrived in March, April and May, and which have sharply weakened sentiment and some timely activity indicators,” he said. Bloxham predicts GDP will go backwards in the June quarter due to the combination of the Middle East war, rising rates and now a budget shock. “The risk is rising that there may be two consecutive quarters of falling GDP,” he said. Both economists point out the need to boost productivity in the national economy.
