The economic landscape is in flux, and mortgage holders are feeling the pinch as interest rates rise. Oxford Economics' chief global economist, Ryan Sweet, has delivered a stark warning: the days of cheap credit are over, and higher interest rates are here to stay. This shift is a result of persistent economic shocks, including conflicts in Europe and the Middle East, and tariffs, which have all contributed to rising inflation. These shocks have become more frequent, ruling out the possibility of a return to the rate-cutting era of the past.
Sweet points out that since the Global Financial Crisis, interest rates have been on a downward trend, reaching an emergency low of 0.10% during the COVID-19 pandemic. However, the post-COVID world has seen a dramatic reversal, with rates jumping back to 4.35%. This increase is partly due to the various supply shocks that have hit the economy. Despite the higher rates, Sweet forecasts that they will remain on hold for the rest of the year, with a gradual easing expected in 2027.
The Reserve Bank has already taken action, lifting the cash rate by 25 basis points in February, March, and May to curb runaway inflation. Official figures from the Australian Bureau of Statistics (ABS) show that the yearly headline inflation rate fell from 4.6% in March to 4.2% in April, primarily due to a temporary halving of the fuel excise and a reduction in GST windfalls. However, the trimmed mean inflation rate, which strips out volatile items like fuel, rose to 3.4% for the 12 months to April, indicating that underlying price pressures remain in the economy.
Australia's unique position is worth noting. With a large portion of households on variable mortgages, small changes in the cash rate can have a significant impact on the economy. This is in contrast to countries like the United States, where monetary policy has a less pronounced effect. Sweet highlights that the country is in a 'gut punch' situation, with rising interest rates and energy prices affecting consumer confidence and spending.
The comparison with the 1970s is an intriguing one. The decade is often characterized as a lost one due to rampant stagflation and an energy crisis caused by higher oil prices. However, Sweet argues that the global economy is now very different, with the US economy being more services-based and consumer spending on energy being relatively low. He believes that the current situation is more of a 'gut punch' than a 'knockout blow'.
The definition of stagflation, which combines slowing growth, higher unemployment, and rising prices, is also being re-evaluated. Sweet suggests that central banks' failure to appreciate the importance of anchoring inflation expectations in the 1970s and 1980s led to stagflation. Today, he argues, inflation expectations are more anchored, which may prevent a repeat of the 1970s.
The Australian economy is indeed slowing, but not to the extent of a disaster. The national economy grew by 0.3% over the quarter to March 2026, with overall yearly growth at 2.5%. However, productivity declined by 0.6%, and HSBC chief economist Paul Bloxham warns that the economy is already under pressure before the full impact of interest rate hikes and the Middle East conflict hits. Bloxham predicts that GDP may go backwards in the June quarter, highlighting the need to boost productivity in the national economy.
In conclusion, the economic outlook is uncertain, with higher interest rates and global conflicts contributing to a challenging environment. While the Australian economy is slowing, it is not in a crisis, but the need to address productivity and inflation remains a critical concern. The future will depend on how effectively policymakers navigate these challenges and adapt to the changing economic landscape.
