The Reserve Bank of Australia (RBA) has raised the official cash rate from 0.1% to 3.35% for the next nine months from April 2022, leaving homebuyers and businesses in shock. as the “new normal”.
Assuming lenders agree to all rate hikes, payments for an average variable rate mortgage of $599,992 (US$416,000) would increase by $19,499.74 annually.
If the mortgage is paid by a couple and each earns an average income, the repayments will be 28% to 39% of pre-tax income. On an after-tax basis, this is between 35% and 49%.
This is clearly not sustainable for many homeowners.
Punter is not happy. ANZ-Roy Morgan consumer confidence index It bounced back slightly in January, reaching 86.8. Although slightly up from the end of last year, he is still one of the lowest levels measured by the index.
It has only dropped once early in the pandemic, and was slightly higher even at the bottom of the global financial crisis.
housing prices Approx. 8.4% decreasethe biggest drop on record.
Government ministers are showing signs of panic, with Treasurer Assistant Stephen Jones claiming that “if this isn’t the last time, we’re close to the last rate hike.”
But what is the Reserve Bank Governor thinking?
Australia faces a situation similar to that it faced in 1973, the second year of the Whitlam government, when the ‘Arab Oil Shock’ pushed energy costs to an expanding economy with huge government funding. is being pushed up.
The world, and most of Australia, entered a period of ‘stagflation’ when the economy stagnated, but prices rose rapidly. Partly due to supply side constraints and partly due to expectations that unions demanded higher wages. And in anticipation of higher wages and inputs, firms preemptively raised prices.
The economic dog chased its tail for nearly a decade until 1982, with the biggest winners being highly equipped speculators.
RBA President Philip Lowe was 12 in 1973 and a college student in 1982, so his formative years as an economist were dominated by crises and their solutions: a tight money supply and microeconomic reforms. I was.
So it’s hard to see how he missed the current crisis, By May 2021 at the latest He did not expect interest rates to rise by 2024, despite massive inflationary pressures built in by COVID measures.
Also, one of the lessons learned from the stagflation era was that interest rates weren’t raised early or quickly enough, so he was more enthusiastic about interest rates than anyone currently thinks. more likely to work.
Once wrong, governors are more likely to overreact to interest rates. Moreover, his term ends in September and is unlikely to be renewed, so his next seven months will ultimately determine his legacy and reputation.
The market consensus is for interest rates to rise another 0.5% to 3.85%. However, some forecasts, such as Morgan Financial, have him up to 4.85% cash rate.
Morgan’s chief economist, Michael Knox, has an enviable forecasting record, and the figure is based on the current unemployment rate of 3.85%.
In Morgan’s February 7 note, the RBA Board is quoted as saying: Lowest rate since 1974“
Morgans speculates from this that the RBA sees unemployment as inflation and acts accordingly.
Governments and consumers may therefore be surprised by high interest rates. They may also be surprised at how long interest rates hold up.
What if a “peak” actually resembles a “plateau”?
If the strategy of governments and consumers is to use reserves to survive until the other side is reached, they may be surprised at how long they will have to “hold their breath.” This will ultimately have a devastating effect on consumer confidence.
Treasurers don’t expect a recession, but I’m not sure.
The chart below shows mortgage rates since 1959 against inflation.
It shows that lending rates were higher than inflation most of the time, except for the situation in 1973-1980 when inflation got out of control…and now.
In periods of stability and containment, interest rates fully take inflation into account and are less volatile than inflation.
The rise in interest rates in the late 1970s persisted into the early 1990s, even after inflation fell.
It gives one clue as to where they are headed.
The other is the RBA governor saying he wants inflation in the 2-3% range. For the period from 1959 to 2022, the average gap between inflation and interest rates was 3.522%. This means that the long-term housing loan rate is around 6.5%.
Government and household pain will continue for quite some time yet.
Views expressed in this article are those of the author and do not necessarily reflect those of The Epoch Times.