Australia’s leading economists have predicted that the Reserve Bank will only gradually increase borrowing costs in response to an increase in household debt during the COVID-19 recession, but warned that official interest rates could easily climb above 3%.
Most economists in The Sydney Morning Herald/The Age Scope survey said they expect rates to remain on hold until August, while some believed homebuyers could have respite until 2023.
RBA has maintained the official cash rate (OCR) at a record low 0.1% since November 2020, in addition to its quantitative easing program that has injected more than $400 billion into the economy through the recession.
The central bank formally ended its quantitative easing in February, and financial markets now expect the bank to lift OCR by more than a percentage point this year to deal with rising inflation. The consumer price index rose 3.5% through 2021 and is likely to lift higher through the first six months of this year.
Scope members were not as hawkish about the bank’s interest-rate plans as financial markets, however, with most highlighting the level of housing debt taken on by Australians as a key factor, The Age reported.
“As the overall level of household debt is relatively high compared to history and the cash rate is at record lows, future interest-rate increases will have a larger impact on households than in previous cycles,” said Besa Deda, St George chief economist, who believes the cash rate will peak at 1.75% in 2024.
Shane Oliver, AMP Capital chief economist, who believes the OCR will peak between 1.5% and 2% in the next 18-24 months, said higher rates would slow economic growth, the jobs market, and housing to keep inflation under control.
“Higher housing debt-to-income ratios than in the past has made the housing market more sensitive to rising interest rates,” Oliver told The Age. “And a significant number of fixed mortgage rate loans expiring in 2023 and rolling over into much higher mortgage rates will act as a de facto monetary tightening. All of which will constrain the amount by which the cash rate will need to increase.”
Bill Mitchell, a professor of economics at the Newcastle University, believed the scale and precariousness of household debts would likely make RBA be cautious with interest-rate movements.
Rate rises would probably fail to dampen inflation pressures and could add to them by pushing up business costs.
“Given the inflationary pressures at present are not being driven by a demand explosion, there will be little impact from rising rates, which will not stop the cartel gouging from OPEC, nor make ships and trucks go faster, nor cure COVID and get workers back to work more quickly,” Mitchell said.
Some Scope members warned that interest rates will push back closer to long-term averages of at least 3%, The Age reported.
Peter Tulip, former RBA economist and now chief economist at the Centre for Independent Studies, said the OCR could peak at 5%, while independent economist Steve Koukoulas believed the cash rate could reach 3.5% late next year or early 2024.
Of the Scope panel, Jakob Madsen, a macroeconomist at the University of Western Australia, was the most hawkish, saying the OCR could hit 8% over the next five years. The last time it was at that level was in the early 1990s as the RBA was slashing rates in response to that period’s recession.
“A thing people and economists forget is that the interest rate has never been lower than now,” Madsen said. “The low interest rates have so far been driven by the savings glut in Asia. However, the party is over. People in the whole world are getting older – particularly the east Asians that, thus far, have been the big savers. They will now use their savings during their retirement, which in turn will force interest rates up.”
Jo Master, EY chief economist, said while interest rates had bottomed out, an increase was not a bad sign.
“It’s important to remember that rising interest rates are a sign of a strong economy and that the first round of interest-rate hikes will make monetary policy less stimulatory – we are a long way from contractionary settings,” Master told The Age. “We do not expect higher interest rates to stop the economic recovery, but make it more sustainable by avoiding overheating.”
