Experts fear a severe rate hike by the Reserve Bank could trigger a recession, with Governor Philip Lowe now accused of underestimating the risk of higher unemployment.
Interest rates this week rose for the ninth straight month to a new 10-year high of 3.35%.
The Reserve Bank issued a new forecast on Friday, three days after Dr Lowe signaled interest rates would continue to rise in 2023 to tackle the worst inflation in 32 years.
The Reserve Bank’s rate hike of 3.25 percentage points since May 2022 marked the most severe pace of monetary policy tightening since the Reserve Bank first announced its cash rate. target in January 1990.
Shane Oliver, chief economist at AMP Capital, said draconian rate hikes risk triggering a recession.
The Reserve Bank’s severe rate hike could trigger a recession with Governor Philip Lowe now accused of underestimating the risk of higher unemployment
“We are increasingly concerned that the RBA is raising rates too high in response to inflation, which is a lagging indicator and is not paying enough attention to the slow flow of rate hikes to the economy,” he said. economy.
‘This is increasing the risk of a recession that we don’t need to and with it a larger increase in unemployment and a steeper drop in house prices.’
Dr Oliver said a 6% change in mortgage rates in 2023 would be as economically damaging as the RBA 17.5% rate in 1990 that led to the recession in 1991 when Paul Keating was treasurer of the bank. Labor party.
‘With household debt-to-income ratios tripling over the past 30 years, mortgage rates of around 6% have now risen above the 17% equivalent that helped send the economy into recession in the early 1990s and the risk of mortgage stress rising more strongly than we would allow,” he said.
Shane Oliver, chief economist at AMP Capital, said draconian rate hikes risk triggering a recession, especially if they rise to 4.1% in the futures market (Exchange chart). Australian Stock Exchange, pictured) is predicting
Dr. Oliver said a recession is almost certain if the RBA rate rises three more times to 4.1%, which the futures market is currently predicting.
A recession in 2023 or 2024 would mark the first interest rate-induced economic contraction in 32 years.
The RBA’s new statement on monetary policy predicts inflation will stay above its 2 to 3 per cent target through June 2025, after last year hitting 7.8 per cent for the first time since 1990.
Although the RBA believes inflation will peak by the end of 2022, the agency has revised its forecast so that the consumer price index falls to 6.75% by June 2023, up from its previous forecast of 6. ,25%.
Commonwealth Bank’s head of Australian economics, Gareth Aird, said the Reserve Bank was too pessimistic about inflation, as global supply constraints had been resolved.
“We think the pace of falling inflation will surprise the RBA,” he said.
‘Upstream inflationary pressures are dissipating rapidly in several key parts of the economy.
‘And pricing power will wane for businesses as demand slows significantly.
‘Commodity inflation is likely to fall pretty quickly.’
Interest rates this week rose for the ninth straight month to a new 10-year high of 3.35%.
Mr. Aird said the RBA had also underestimated the prospect of higher unemployment due to rising interest rates.
“On balance, we believe the RBA’s projections underestimate the impact their policy tightening will have on the economy,” he said.
‘RBA’s forecast for unemployment looks upbeat.’
Mr. Aird said the Reserve Bank’s forecast for gross domestic product to fall to just 1.5% by December 2023 means next year’s unemployment will be higher than their projections.
‘No economist has a crystal ball. But the RBA’s forecast record for unemployment looks too positive for us based on their GDP forecast,” he said.
The December unemployment rate remained at a 48-year low of 3.5% but the Reserve Bank expects the rate to rise to 4.1% by June 2024.
Mr. Aird said the unemployment rate could be slightly higher, to 4.4% by the middle of next year.
AMP forecasts property prices will fall between 15% and 20% from their peak in 2022.
If that materializes, the median house price in Sydney will drop by $283,392 from $1,416,960 in April 2022 to $1,133,568 when the market bottoms out in 2023 or 2024.
In the year to January, Sydney house prices fell 15% to $1,205,618.
Even so, the average full-time borrower with a salary of $92,030, with a 20% deposit will have a debt-to-dangerous income ratio of 10.5.
Variable mortgage rates are up 43% since May 2022, with borrowers with an average $600,000 loan now paying $3,303 a month with the latest rate hike, up from $2,306 nine months ago.
This coincided with the Commonwealth Bank’s variable rate hike from 2.29% to 5.22% to reflect moves in RBA rates.
Commonwealth Bank, Westpac and ANZ are forecasting a RBA cash rate of 3.85% in April or May with two more rate hikes.
This means that a borrower who fixed their mortgage at the ultra-low 1.92% in May 2021 would face a straight move to a ‘return’ variable rate of 7.18% .
This equates to a sudden 65% increase in monthly payments on a 25-year loan.
Fixed-rate contracts two years ago said borrowers would switch to a ‘return’ rate 3.43 percentage points higher than the RBA’s cash rate when it was at a record low 0.1%.
Source: | This article originally belonged to Dailymail.co.uk
