Why the Reserve Bank will have to cut interest rates by Christmas to ward off a recession
The Reserve Bank of Australia may need to cut rates by Christmas to avoid a recession, financial experts have told Daily Mail Australia.
Two of Australia’s major banks, NAB and ANZ, both expect a quarter of a percentage point increase in 2023, which would push interest rates to an 11-year high of 4.1 percent.
AMP chief economist Shane Oliver said just one rate hike would be enough to trigger a recession in Australia as borrowers are already paying down record levels of debt and proposed rates should be cut by the end of 2023.
‘Debt redemption is heading towards record levels – which carries a very high risk of entering a recession’ he told Daily Mail Australia.
Every time you raise interest rates, your risk of a recession increases. The economy could collapse faster.’
If interest rates are cut, as Dr. Oliver says should happen, banks could pass that on to borrowers, meaning mortgage payments start to fall again.
The Reserve Bank of Australia may have to cut rates by Christmas to avoid a recession if interest rates rise again ahead of time – with a rapid fall in inflation ahead
But RBA Governor Philip Lowe has already warned that “further monetary policy tightening may be necessary,” and his predecessor Glenn Stevens says interest rates may need to remain high.
The minutes of the Reserve Bank’s meeting in May, which saw its eleventh rate hike in a year, have suggested it plans more hikes with the aim of curbing inflation.
“Members also agreed that further rate hikes may still be necessary, but that this will depend on how the economy and inflation evolve,” it said on Tuesday.
It is feared that with more rate hikes, Australia will repeat the experience of the late 1980s, when sharp interest rate hikes triggered a recession in the early 1990s.
Another rate hike would also raise the variable mortgage rate above 6 percent, for borrowers with a 20 percent mortgage deposit.
This would be equivalent to the mortgage rate of 17 percent in the late 1980s, because household debt now accounts for 188 percent of income, compared to 68 percent then.
Sydney’s median house price of $1.25 million is 10.7 times an average full-time salary of $94,000, even with a 20 percent mortgage.
AMP chief economist Shane Oliver said even one more rate hike would be enough to trigger a recession in Australia as borrowers are already paying off record debt
A working couple with children, with a combined income of $141,000 with one parent on a part-time wage, would already be in mortgage stress.
That’s because their debt-to-income ratio of 7.1 is well above the banking regulator’s “six” threshold for stress.
Dr. Oliver said the risk of recession was already 45 percent even without another rate hike, and argued that the Reserve Bank should cut rates in December 2023 and again in February 2024, followed by more relief in March or April. to avert a recession.
“That will be necessary, because the economy will slow down sharply,” he said.
Australia’s largest banks also expect rate cuts and the Commonwealth Bank forecasts relief for borrowers in November and December, followed by three more cuts in 2024.
But former RBA governor Glenn Stevens suggested rate cuts were unlikely once the tightening cycle was over.
“I think a return to the ultra-low rates we saw there for a while is unlikely,” he said at a conference of the Australian Petroleum Production & Exploration Association on Tuesday.
“I could be wrong, but if that’s the case then I think we’ve also moved from a world where interest rates were low for a long time… to one where they will be elevated for some time to come.”
Wages rose 3.7 percent in the March quarter, the fastest rate since 2012, adding to inflationary pressures.
An economic contraction in 2023 would be the first interest rate-driven recession since 1991, which followed interest rates of 18 percent in late 1989.
While inflation hit a 32-year high of 7.8 percent in 2022, it moderated to 7 percent in the March quarter.
Dr. Oliver said inflation is likely to halve to 3.25 percent by the end of 2023 and top the RBA target of 2 to 3 percent by June 2024 — falling faster than predicted by the Treasury or the Reserve Bank.
He based that scenario on the RBA’s 11 rate hikes since May 2022, enough to slow consumer spending.
“Inflation will only go down because of the tightening we’ve already seen,” said Dr. Oliver.
“The delayed flow of that into economic activity — leading to a more rapid slowdown in inflation.”
He feared that the Reserve Bank could trigger a recession by becoming too obsessed with inflation, which is a lagging indicator of consumer behavior.
“A lot of the debate is all about inflation and interest rates, but they ignore the overall context of much higher levels of debt – that’s often lost in the discussion,” said Dr. Oliver.
The past year’s rate hikes have also been made without major intervals, marking a major departure from increases since the RBA adopted a target cash rate in 1990.
“This time we’re not giving much time to assess the impact,” said Dr Oliver.
The RBA raised interest rates by another 25 basis points in May to 3.85 percent, with pauses over the past year occurring only in January, when the Reserve Bank does not meet, and April.
National Australia Bank expects another quarter of a percentage point increase in July – bringing it to 4.1 percent – while ANZ has signed that increase for August.
The minutes of the Reserve Bank meeting in May, which saw rates hiked for the 11th time in a year, suggested more hikes were likely to curb inflation (pictured is a Sydney auction)
That would be the twelfth increase in just over a year.
It’s more like the rapid, rapid increases we saw in 1988 and 1989 — which took place against a backdrop of low unemployment, high inflation and relatively high wage growth — but it turns out that the Reserve Bank then made the mistake of going too far, probably a little too backward and then we got into an early 1990s recession,” said Dr. Oliver.
“That’s what worries me here: by raising interest rates quickly, as we have done in response to lagging indicators such as labor market tightness and still high inflation, we risk overdoing it as we did at the end of the decade.” 80 did and end up with a recession.’
Treasury documents forecast economic growth to halve to 1.5 percent in 2023-24, from 3.25 percent in 2022-23.
The Reserve Bank forecasts a very weak growth rate of 1.25 percent by December 2023.
This is below the long-term average of 3 percent.
RBA Governor Philip Lowe warned this month that ‘further monetary policy tightening may be necessary’, with minutes of the board meeting in May suggesting ‘further rate hikes may still be needed’
The Reserve Bank’s rate hike in May has already caused Australian consumer confidence to fall to its worst level since April 2020, when Covid lockdowns triggered the latest recession.
ANZ-Roy Morgan’s May measurement of consumer confidence, based on online and telephone interviews with 1,480 people, yielded a score of 75.9 points.
This is well below the 100 level, where optimists outnumber pessimists, and it is well below the long-term average of 112 since 1990.
The Westpac-Melbourne Institute’s consumer confidence measurement for May yielded a score of 79 – down 7.9 percent from April.
The value is only slightly above March levels, the worst since the Covid outbreak in early 2020 and the recession of the early 1990s.
Bill Evans, Westpac’s chief economist, said the RBA’s “surprising” rate hike in May was a major factor, along with a poor receipt of the federal budget.
“The move came as a big surprise to markets and most commentators, and clearly fueled consumer fears of further hikes,” he said.