Surprisingly, given the number of previous forecasts for a rise of 0.40%, the consensus for today’s rise in the Reserve Bank’s cash rate now seems to have shifted to 0.25%, which would put the key rate up to a somewhat untidy 0.60%.
Except for accounting tidiness, there is no reason a 0.25% rate rise won’t work, but some economists reckon that a 0.40% increase is large enough (and would set the cash rate at 0.75% and make a 0.25% rise next month look logical) to make the point that the central bank is as concerned about inflation’s rapid rise as their colleagues in the US, Canada and New Zealand – each of which has one or two 0.5% rises on the board already.
Goldman Sachs Australia’s economics team says that while high household debt is a legitimate risk to medium-term economic activity, the picture is highly nuanced, and won’t preclude the central bank from taking the official cash rate toward 2.6% this year.
“Massive financial buffers such as elevated household savings, high levels of home ownership and seven years of strong regulatory clamps on loose mortgage lending by banks have built resilience into household and bank balance sheets,” Goldman Sachs Australia and NZ Andrew Boak wrote in a note.
“There are risks to normalizing monetary policy in Australia…But we view these risks as manageable,” he said. Net housing debt as a share of income has fallen materially since the global financial crisis, and the median Australian mortgagee is 21 months ahead on their mortgage repayments.
Mr. Boak agreed with the RBA’s own estimate that a neutral official cash rate would be somewhere around 2.5%.
Some economists claim that a 0.25% rise would be enough to start putting pressure on demand – after all house prices are easing, especially in the major states and commentators are busy more trying to forecast the size of the fall in house prices – and going for a bit of overbidding, especially anyone talking about average falls around 15% or more. That’s an alarmist prediction at the moment.
Many of these house price forecasts are designed to grab headlines and are a form of economic clickbait – remember that Nine/Fairfax with Domain and News Corp with REA Group control key property listings businesses (and sources of higher revenue and profits) and therefore have a vested interest in writing and discussing house prices and interest rates for commercial, as well as newsworthy reasons.
In the minutes of its May monetary policy meeting, the RBA ruled out a small 0.15% tidy up rise as it would send a wrong message (it would not be all that convincing a rise and could be stimulatory). But a larger rise?
“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates. However, members agreed that the preferred option was 25 basis points. A move of this size would help signal that the Board was now returning to normal operating procedures after the extraordinary period of the pandemic.
“Given that the Board meets monthly, it would have the opportunity to review the setting of interest rates again within a relatively short period of time, based on additional information.”
That meeting is today, there’s clear signs of added inflationary pressures from higher energy (especially gas) prices and petrol and oil prices are still rising), so for that reason economists feel that a 0.40% rise is more possible than a ‘steady as she goes’ 0.25% increase as in May.
One area of worry is the impact of rate rises on home owners with mortgages, especially relatively new ones.
Senior executives from all four major banks have said recently they are confident that most new mortgagees have enough leeway (buffers) and extra savings to support them in a rising rate environment.
Relatively new home owners who have paid hefty amounts for their dwellings with big home loans, are prime candidates for the scare campaign and yet those wild forecasts fail to mention that, for several years now, banks lending for home mortgages have had to do so on the basis of the “new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate.”
That holds the responsibility to the banks if their borrowers get into trouble, or are exposed as having a so-called ‘liar loan’.
This was a directive to lenders last October from APRA, the key bank regulator came with the agreement of other major regulators – the Reserve Bank, ASIC, Federal Treasury, as well as the competition authority, the ACCC.
APRA Chair Wayne Byres said in the October statement that “this is a targeted and judicious action designed to reinforce the stability of the financial system.”
So the thousands of new home loans issued since October have sold done only if home owners can afford mortgage rates to rise to between 5% and 7%. Many new home loan rates for owner occupiers are around 4% or so, at the moment, after the 0.25% increase by the RBA in May.
August, 2021 housing finance data from the Australian Bureau of Statistics showed $30.76 billion worth of new home loans were issued, 47.4% higher than a year ago. Last Friday, the April data from the ABS showed that $30.989 billion was lent for housing – in other words, home lending has slowed in recent months to be flat over the last 9 months.
That was after a peak of $33.049 billion in January of this year which means there has been a 10% drop in lending in the first four months of 2022.
That disguises the real situation a little in that investors’ finance is up but owner-occupied lending is lower at $19.9 billion in April against nearly $21.1 billion in January – that’s a fall of nearly 10%. investor lending though has only eased to $11.084 billion in April from $11.36 billion in February.
Home building approvals continue to weaken with total dwelling approvals down 32% in the past year and off more than 205 since the most recent peak in February.
But the AMP’s chief economist Shane Oliver says that despite the weakness “there is a huge backlog of homes approved and commenced but not yet completed (due to the impact of supply constraints, labour shortages and bad weather) point to strong home building activity for a while yet.”
And the Reserve Bank’s May meeting minutes showed the central bank equally relaxed on this point “Dwelling investment had been curtailed by supply disruptions, including poor weather conditions on the east coast, but was expected to remain at a high level given the large pipeline of work.”
