Economists and business leaders have warned that more interest rate hikes risk tipping the economy into recession as scrutiny of the Reserve Bank of Australia's handling of monetary policy intensifies.
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Following hawkish comments by Reserve Bank governor Philip Lowe on Tuesday, markets have upgraded their forecasts and now expect interest rates to reach close to 4 per cent by the middle of the year.
The prospect of more rate hikes has alarmed a major employer group, which warned that tighter monetary policy runs the risk of triggering a recession.
Ai Group chief executive Innes Willox said even before the latest rate hike there were signs that activity in manufacturing and business services was contracting.
The Australian Industry Index, which tracks performance across manufacturing, construction and business services, dropped to minus 11.6 points in December-January as sales, new orders and input volumes all contracted while the pace of hiring, prices and wages softened.
"The [index] points to a slowdown in activity in the industrial sector. This suggests that the general slowing the RBA is seeking has gone beyond the reduction in retail sales in the December quarter," Mr Willox said.
"Without doubt, the RBA's moves on interest rates, in combination with other factors, could see Australia tip into recession.
"As we get further along the path of tightening monetary policy, we must get closer to such a tipping point and closer to the point where further rises in interest rates will be too much."
In remarks announcing the latest rate rise, Dr Lowe admitted the Reserve Bank Board had to navigate a narrow path in trying to tame inflation while keeping the economy on "an even keel".
But RBC Capital Markets chief economist Su-Lin Ong said the path had now become a "tightrope".
Ms Ong, who tips successive rate rises in the next two months to push the cash rate to 3.85 per cent, said late last year the central bank had been trying to chart a course to reduce inflation while supporting employment.
But she said its stance had changed and lowering inflation was now its overriding goal, even at the expense of growth.
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"There had been a reluctance to squeeze too hard but our sense is that the narrative has changed," Ms Ong said.
The pain caused by higher interest rates is intensifying the pressure on the government over its economic management.
Treasurer Jim Chalmers said the government was pursuing a three-point plan to support the Reserve Bank's efforts to curb inflation, including providing "responsible" cost-of-living relief, tackling supply chain issues such as skills shortages and exercising spending restraint.
Dr Chalmers refused to be drawn on the future path of interest rates, saying the "Reserve Bank does its job independently".
But Assistant Treasurer Stephen Jones was more forthright about the rates outlook, telling Sky News that they "should be at the top or near the top".
Rejecting Greens calls to overturn the latest rate hike, Mr Jones said such an action would create chaos.
"Or course, we have opinions. We think inflation has peaked. We think we should be at the top, or near the top, of any tightening of monetary policy," he said.
The future of the RBA governor has also come back into focus.
The Treasurer will next month receive the results of a review he commissioned of the central bank and Dr Lowe will be up for reappointment in September.
Dr Chalmers said he would consult with his colleagues in considering whether to renew Dr Lowe in the role.
But some government MPs have publicly remarked on the governor's performance.
Labor MP Julian Hill, who is chair of the Joint Committee of Public Accounts and Audit, said that although he was not personally attacking Dr Lowe, the governor's 2021 comments that a rate hike before 2024 was unlikely had been "less than wise".
"I would think it is not a controversial observation that both independence and judgement are required [of the RBA governor] and the country should have broad confidence," Mr Hill said.
Asked if that confidence had been damaged, the Labor MP pointed to "criticism that has been made by respected economists, discussion that has been heard in Economics Committee hearings ... that making a highly specific forecast was less than wise".
Mr Hill said he was "very consciously not making a personal attack because I fully respect the independence of the Reserve Bank. They have got a difficult job to do".
National Australia Bank chief economist Alan Oster said the bank's interest rate forecasts were under review following Tuesday's rate hike.
Mr Oster said the results of a business survey NAB undertook in January would provide an important update as he tries to judge how much higher interest rates are likely to go.
The economist said that trying to gauge how the economy was currently faring, including business conditions and the strength of consumer spending. was "very tricky".
