Q+A: Why another rate hike is now a very real risk

Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics and more. I'm Michael Thompson, and the Australian economy has grown a little faster than expected, with GDP rising 0.4% in the June quarter, 2.1% over the year. Consumers are still spending, household savings have actually risen, and the economy has proved pretty resilient, despite three interest rate rises, high oil prices, very stubborn inflation. Diana Messina is Deputy Chief Economist at AMP. Diana, welcome back to Fear and Greed Q&A. Hey, Michael. Great to be back. So what did you make of it? What did you make of yesterday's data?

We called it Goldilocks and the three bears, which are inflation, the Middle East crisis, and rate hikes, which is basically the things that were dragging down growth in the first six months of 2026. I mean, overall, just the growth rate looked fairly soft. It was 0.4% over June. But over the years, it was above the RBA's own forecast. It was 2.1%. The RBA was looking for 1.9%. I mean, it looks like a bit of a... only a little bit of a miss, but for the RBA, it is actually an upside surprise. I mean, the growth rate is really being flattered by a high December quarter print that we got. So it's not like 2026 was a particularly strong year of growth, but it's coming in line with expectations and we sort of need and want softer GDP growth because we're trying to reduce spending to get inflation down. So I think the outcome is sort of very much wanted by policymakers.

I mentioned in the intro and I described it as being reasonably resilient. Is that wrong? Is it too soon to call it resilient then because it'll take longer for the rate hikes to actually take a more significant effect?

I think that you're okay to call it resilient because it's true. We haven't seen a big fall in consumer spending. Actually, consumer discretionary spending was up in the June quarter, mostly because this huge increase to spending for electric vehicles. But nevertheless, people obviously have the money to spend on EVs, so they are. If we forecast out, we are going to see a further slowing in growth due to higher interest rates. But we basically think that GDP growth is going to bottom at about 1.4%. And if you annualise the first six months of this year, the growth rate was 1.4%. So it's like this soft pace of growth is just going to continue.

Consumers, we are still spending despite the three rate hikes that we've already had, despite these persistently high living costs. What's keeping households going? How are we still spending as much as we are?

It's basically income growth. And I think some people don't believe me when I say that because they think, well, my real income has gone backwards. But when you look at it from an overall income point of view, the overall income that we get is not just your wage income. It's also investment income that we have. And then, of course, you take out some of the things that drag down income like taxes, mortgage interest. And when you're thinking about real income, you obviously take out inflation. And we have seen a slowing in real disposable income because we've seen more people paying a