This article is from the Australian Property Journal archive
THE Reserve Bank has raised interest rates by 50 basis points for the fifth month in a row to 2.35%, at the current rate of increases, it is expected to peak at 3.8% which will send house prices tumbling by 30%.
RBA governor Philip Lowe said inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead.
The RBA is expected inflation is expected to peak later this year and then decline back towards the 2–3% range, reflecting the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates.
Its central forecast is for CPI inflation to be around 7¾% over 2022, a little above 4% over 2023 and around 3% over 2024.
Capital Economics senior economist Marcel Thieliant said although the bank dropped some hints that further tightening will be less aggressive, he still expects the RBA to hike rates more aggressively over coming months than most expect, which will weigh heavily on activity and prompt renewed rate cuts by the end of next year.
“With the economy overheating, the Bank will need to lift rates well above neutral levels. As such, it’s possible that the Bank will only slow the pace of tightening if the Q3 inflation figures due at end-October show a moderation in price pressures. Indeed, the financial markets price in a large chance of another 50bp hike next month.
“Either way, we reiterate our long-held view that the Bank will ultimately lift the cash rate to 3.6%. That is well above the analyst consensus of around 3% though much closer to the peak of 3.8% price in by financial markets,” said Thieliant.
AMP Capital head of investment strategy and chief economist Shane Oliver is not as hawkish as the financial markets.
“We expect the RBA to so slow the pace of hikes in the months ahead and will watch Governor Lowe’s speech on Thursday for any guidance in this direction, but its looking like our assessment for the cash rate to peak at 2.6% around year end is now too conservative so we have revised it up to 2.85%,”
Oliver said if the market expectations of a peak around 3.8% in the September quarter next year is realised, it would likely plunge the economy into recession and push home prices down by 30% or so from their highs earlier this year.
“We continue to see the RBA starting to cut the cash rate in the second half of 2023. We remain of the view that the cash rate won’t have to go well above 3% before the RBA achieves its aim of cooling demand enough to take pressure off inflation and keep inflation expectations down.
“First, global supply bottlenecks are continuing to show signs of improvement with reduced delivery delays, lower freight costs and falling metal and grain prices.
“Second, while energy prices are likely to remain high, they may be getting close to their peak so their contribution to ongoing inflation may go to zero later this year.
“Third, many households will experience a significant amount of pain from higher rates. For example, a variable rate borrower on an existing $500,000 mortgage will see roughly another $140 added to their monthly payment from today’s RBA hike which will take the total increase in their monthly payments since April to nearly $650 a month. That’s $7800 a year which is already a massive hit to household spending power. And there is roughly a quarter of mortgaged households with fixed rates who will see a doubling or more in their payments when their fixed term expires over the next two years.
“Finally, while coincident and lagging indicators of the economy like retail sales and jobs data are still strong, leading indicators tell us the RBA is getting traction – consumer confidence is at recessionary levels, housing indicators are falling sharply and home prices are now also falling sharply which will depress consumer spending via a negative wealth effect,”
Oliver said his revised peak of 2.85% will continue to see average home prices falling 15-20% top to bottom.
Thieliant said the RBA’s aggressive tightening will slow more sharply over coming quarters.
“The upshot is that we expect the Bank to reverse course next year by cutting interest rates towards the end of the year. That view is neither shared by the analyst consensus nor by the financial markets, which expect the cash rate to remain high for the foreseeable future,” he continued.
Oxford Economics head of macroeconomic forecasting Sean Langcake said downside risks to the outlook are mounting, with the RBA acknowledging that a slowing global economy and imported inflationary shocks are narrowing the path to a soft landing from the current high inflation rate.
“The combination of weaker growth and higher inflation that these shocks bring is especially challenging. Nevertheless, we expect the pace of interest rate hikes will slow from here.
“The RBA has tightened conditions materially and we expect they will soon pause to assess the impacts of the very large shock to interest rates they have put through the household sector. Our current forecast is for the cash rate to reach 2.6% at the end of 2022, although risks to this forecast are wholly skewed to the upside.” Langcake said.
ANZ Economics head David Plank maintained the view that rates will rise above 3%, although he added that the size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.
“We see little reason to change our expectation that the cash rate will be above 3% by the end of the year, especially when we consider the outlook for the labour market. But the path to that 3%-plus level may be a little less steep than our current track of +50bp in both October and November.” Plank concluded.
