Starting next March RBA could lift interest rates eight times over two years: Ex-board member John Edwards

Starting next March RBA could lift interest rates eight times over two years: Ex-board member John Edwards
Starting next March RBA could lift interest rates eight times over two years: Ex-board member John Edwards

The Reserve Bank of Australia could raise interest rates eight times in the next two years, given the central bank’s inflation target, according to former board member John Edwards.

The RBA is possibly already considering a schedule of rate increases given its forecasts for inflation returning to target and economic growth rising to 3 percent against a stronger global backdrop, Bloomberg reported, referring to a column Edwards wrote on the website of the Lowy Institute for International Policy, where he is a non-resident fellow.

The central bank has held rates at a record low of 1.5 percent since last August.

At its June meeting, its Board decided to leave the cash rate unchanged at 1.5 percent, with Governor Philip Lowe saying that conditions in the housing market vary considerably around the country.

The long-term cash rate was about 3.5 percent -- below the 5.2 percent average over the past two decades -- and the RBA wants to start tightening in 2018 and reach its goal within two years, which would require four quarter-point increases each year, he said. 

“It seems to me that something like eight quarter percentage point tightenings over 2018 and 2019 are distinctly possible, if the RBA’s economic forecasts prove correct,” said Edwards, who was on the bank’s board until July 2016, Bloomberg reported.

“It’s possible the tightening could start earlier, or if not the tightening itself, at least the signaling which should precede it. We may be seeing a little of that now.”

Separately on the Money News show by Ross Greenwood on 2GB, Edwards, a former chief economist of HSBC, said the policy rate would not go higher than 3.5 percent because of the household debt.

When asked by Greenwood that some economies, like Canada and New Zealand, were pushed into recession by rate rises… and if a similar situation could arise in Australia, Edwards said that the RBA would proceed very cautiously. 

The first rate rises are likely not to come before February-March next year, opined Edwards and then increases every quarter.

Traditionally, the RBA changes rates in small increments and typically doesn’t commit itself to subsequent moves, making the market wary of predicting where the bank will be in a few years, Edwards said. 

In the current circumstances, he said we can reasonably assume:

  • the RBA considers its current rate to be exceptionally low 
  • if the economy improves as it predicts, the next move will be up 
  • if the economy was operating, as the RBA predicts, at 3 percent output growth and 2.5 percent inflation, it would think of a sustainable or natural policy rate of at least 3.5 percent 
  • most importantly, it will want the policy rate increase to match the forecast improvement in Australia’s economic performance, so rising to at least 3.5 percent by the end of 2019

 He noted the risks of rate increases amid record high household debt, a fact even noted by RBA Governor Philip Lowe.

“The bigger the household debt, the more impact a quarter percentage point increase in the policy rate will have on household spending,” he said. 

“In the Australian case, it is certainly possible that high household home mortgage debt will crimp consumer spending if the policy rate returned to what was once considered a relatively low long-term rate.”

Still, Edwards noted that interest paid on Australian mortgages is much less than it was six years ago: while debt has increased, interest rates have fallen a lot. 

Payments are now 7 percent of disposable income compared with 9.5 percent in 2011, and 11 percent at the peak of the RBA tightening cycle before the 2008 financial crisis, he said.

He said tightening steps would be dictated by how the economy performs.

“If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”

Tags: 
Mortgages Household Debt

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