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Reserve bank governor Philip Lowe has admitted he made a mistake in suggesting that interest rates would not rise until 2024 and is now hinting at a 10 percent drop in house prices.
The economist responsible for setting monetary policy has repeatedly vowed that cash interest rates would remain at a record low of 0.1 percent in 2021 for another three years.
But dr. Lowe told the Canberra House Economics Committee that it was a mistake to make “conditional” and “explicit” forecasts about interest rates in 2020 and 2021, before Russia’s invasion of Ukraine pushed up crude oil prices.
“Some people think that was a mistake and it could very well be,” he said Friday morning.
The RBA chief also admitted flaws in forecasting inflation during the pandemic, but argued that other central banks had made the same mistake.
“Our predictions have not been so good,” he said.
“Everyone is wrong and the Reserve Bank is wrong too and when we make prediction errors of this magnitude it’s up to all of us to look back and ask ourselves what we could have done differently, what we can do about it.” to learn. .’
Reserve banking governor Philip Lowe has admitted he made a mistake in suggesting interest rates wouldn’t rise until 2024
Borrowers since May have endured five consecutive monthly rate hikes, with the 2.25 percentage point increase equating to the most severe monetary policy tightening since 1994.
The cash interest rate is now at its seven-year high of 2.35 percent, with Dr. Lowe Friday hinted at more interest rate hikes, with inflation expected to hit a 32-year high in 2022.
As a result, house prices are falling, with Dr. Lowe suggested that while he didn’t make any real estate forecasts, a 10 percent drop after a 25 percent increase during the pandemic would still equate to a net profit of 15 percent per year. cent.
“I wouldn’t be surprised if prices fell by a cumulative 10 percent,” he said.
As a result, house prices are falling, with Dr. Lowe suggested that while he didn’t make any real estate forecasts, a likely 10 percent drop after a 25 percent rise during the pandemic would still equate to a net profit of 15 percent a year. cents (pictured is a house in Melbourne)
But dr. Lowe told the Canberra House Economics Committee that it was a mistake to make “conditional” comments on interest rates last year before Russia’s invasion of Ukraine pushed crude oil prices up.
“Even if they did, they’re still up 15 percent three years from now, so it’s hard to know.
‘If interest rates continue to rise and rise further, I expect that more heat will come out of the housing market and that prices will fall further.
“We have to remember that prices have increased by 25 percent in two years – people complained that house prices were rising too quickly.”
Australia’s most powerful banker noted that people were constantly whining about real estate prices.
“As a society, we complain that prices are rising or falling,” he said.
dr. Lowe said higher land prices, especially on the coast, were responsible for expensive house prices after Sydney independent MP Allegra Spender asked him about housing affordability.
“We’ve embedded high land prices that give us high house prices,” he said.
“But the fact that Australians have to pay higher prices for housing has nothing to do with the Reserve Bank, it’s the choices we have made as a society.”
Sydney’s median home price stands at $1.3 million, despite a 7.3 percent drop since early January, CoreLogic data shows.
Melbourne’s median home price is $948,879, with values falling 5.1 percent since the start of 2022.
But since the start of 2022, Brisbane’s average house price has risen 5.9 percent to $864,149.
In August, house prices fell in every capital city except Darwin, with the downturn starting in Sydney and Melbourne before the RBA raised rates in May for the first time since November 2010.
Severe monetary policy tightening has already hit the real estate market, as CoreLogic data shows a 1.6 percent drop in national home and unit prices in August — the strongest monthly drop since January 1983.
National house prices fell to a median level of $738,321 last month.
But even with a 20 percent down payment, a $590,657 mortgage would be out of reach for a full-time employee with an average salary of $92,000.
ANZ is now hinting that interest rates could continue to rise in 2023, after it was previously expected that spot interest rates would peak at 3.35% in 10 years in December.
dr. Lowe said he wouldn’t be specific with a date in the future when it came to making interest rate predictions, even if he talked about existing economic conditions during a “unique period in history.”
“Our language about the timing will be vaguer than I’ve tried to be today,” he said.
“We will be much less inclined to do that in the future, I still think it was the right thing to do then.
“I don’t think it’s going to be part of the mainstream way we work.”
During the pandemic, the Reserve Bank had chosen to make “explicit” predictions.
“That was very different,” he said.
“We took the extra step of … making explicit statements about timing, even though they were reserved.”
He was adamant that his comments had been interpreted as promises when they were comments based on current economic conditions.
“I’m often reminded that many people interpreted our earlier communication as a promise or a commitment that interest rates would not rise until 2024,” he said.
‘This is despite the fact that our statements about interest rates have always depended on the state of the economy.
“This conditionality has often been lost in news coverage, so we are currently working on the implications of this for our future forward guidance approach and for communication in general.”
Inflation remained below the Reserve Bank’s target of two to three percent for most of last year, but rose to 3.8 percent in the June quarter of 2021.
Treasurer Jim Chalmers launched a review of the Reserve Bank’s monetary policy decisions in July, focusing on its communication strategy.
Inflation in the year to June rose 6.1 percent, but the RBA and the Treasury now both expect it to hit a new 32-year high of 7.75 percent in 2022.
dr. Lowe said inflation is likely to remain above the two to three percent target for another two years, meaning interest rates could remain high.
Continued high inflation threatened to trigger another recession, which occurred in 2020 for the first time since the start of the pandemic in 1991.
“The longer it stays above three percent, the harder it gets,” he said
“If that happens, we’ll have higher interest rates and a recession.”
dr. Lowe told the hearing that the RBA was considering whether to raise cash interest rates by 25 or 50 basis points in October, representing a 0.25 percentage point increase or a 0.5 percentage point increase.
ANZ released a new economic note on Friday, forecasting a 50 basis point rate hike in October with more rate hikes in 2023 – after previously forecasting spot rates to peak in 2022 amid this monetary policy tightening cycle.
‘Tightening can last until 2023’, according to the bank.
“We suspect a possible extension to 2023 will come after a pause of several months as the RBA tries to gauge how much inflationary pressures are easing after 325 basis points of rate hikes.”
ANZ expects spot interest rates to hit a 10-year high of 3.35 percent in December, which would mark a 3.25 percentage point increase since the era of record-low cash interest rates of 0.1 percent ended in May .