by Reserve Bank governor Michele Bullock has warned that some Australians may have to sell their homes in her first public comments on the state of the economy since the June quarter GDP figures were released on Wednesday.
Here are five key takeaways from Bullock’s speech on Thursday at the Anika Foundation fundraising luncheon in Sydney.
Are higher interest rates ‘killing the economy’?
Bullock was repeatedly asked whether the RBA’s 13 interest rate hikes from May 2022 were “breaking the economy”, as the treasurer, Jim Chalmers, said ahead of the release of this week’s GDP numbers.
The governor avoided a direct answer but said: “He’s doing his job and I’m doing mine, I wouldn’t use those words.”
By and large her speech, titled Costs of High Inflation, addressed some of the more bleak and successful commentary on the economy.
Yes, vacancies and some other measures were getting worse, but the labor market “remained strong”, she said. It is, therefore, hardly a “pulseless” or “stagnant” economy, or “broken” as some commentators have described it.
Some people will be forced to sell their homes
Bullock’s predecessor, Philip Lowe, once took him to task for suggesting that people might have to get a roommate or move back in with parents to deal with higher housing costs. (He later said the comments were taken out of context.)
Bullock went somewhat down a similar path. The RBA has estimated for some time that “around 5%” of owner-occupiers on variable rate loans would be in relative distress after successive rate rises.
On Thursday, the governor repeated that number for those borrowers “in a very challenging situation” where income is not keeping up with “necessary spending and scheduled mortgage repayments”.
While families have been getting by by cutting back on essentials, switching to lower-quality goods and services, dipping into savings or working more hours, Bullock said that’s not always enough.
“Some people may end up making the difficult decision to sell their homes,” she said, noting that lower-income borrowers were “overrepresented in the group of people who are really struggling.”
Of course, a sale would be bad news for those involved. Bullock’s general point, however, was that allowing inflation to remain higher for longer would spell a worse fate for society’s heroes.
Interest rates are unlikely to be cut early in the term
Unless the economy is “broken” and, as Bullock says, “only a small proportion of borrowers are at risk of reducing their mortgage repayments”, that means the RBA is not ready to cut its key cash rate.
As Bullock noted a month ago (after the RBA’s August meeting), market expectations that a rate cut is imminent are “not in line” with his board’s thinking.
“Circumstances may change, of course, and if economic conditions do not change as expected, the board will respond accordingly,” she said Thursday. “But if the economy turns around as expected, the board doesn’t expect to be able to cut rates anytime soon.”
There are only three board meetings left this year, with the first in 2025 scheduled for February 17-18 and then March 31-April 1. Critics who think the RBA should be slashing interest rates now may see some irony in an April Fool’s Day rate cut.
A ‘supply gap’ still exists
The RBA’s chief economist, Sarah Hunter, said last month that “we’ve been in this position where the economy has been running a bit warm for a while”, just as Bullock said the economy was running “hotter” than the bank command. was predicted.
Those views do not seem at odds with an economy that has just completed the slowest financial year expansion rate (at 1.5%) since 1991-92 – excluding the pandemic.
But what Hunter and his boss wanted to emphasize was that demand compared to supply was stronger than expected, say, three months ago. That imbalance must disappear if inflation (at least the excess demand part) continues to fall towards the RBA’s 2-3% target range.
As Bullock said on Thursday, “GDP itself was about where we predicted”, even if some of its components (eg consumption) were weaker than the RBA had predicted.
“Part of the job of monetary policy is to try to slow the growth of the economy because the level of demand for goods and services in the economy is greater than the ability of the economy to provide those goods and services,” she said. “So, though [the economy’s] slowing down, we still have this gap.”
The RBA’s forecasts may not be what it believes will happen
Much of the RBA’s updated forecasts every three months is made into its statement of monetary policy. (See August here.)
An unusual feature, however, is that they are partly based on fixed financial markets think the RBA cash rate will go. For the August forecasts, the RBA used cash rate forecasts as at 31 July (coincidentally the day the June quarter CPI numbers landed).
If the picture had been taken on, say, August 5, when the RBA was finishing its rate hike, cash rates were predicted to plunge – along with global financial markets.
Does it matter?
In the RBA’s May forecasts, the markets were betting that the cash rate by December 2025 would be 3.9% (suggesting that there was a good chance of two .25 basis point rate cuts by then) . The August forecasts assume that the cash rate would be reduced to 3.6% by the end of 2025 (or a 100% chance of three cuts). The unemployment rate would peak at 4.4% – assuming those bullish investors were right.
Bullock said the RBA can “do that exercise” to model the way it thinks its own cash rate will take. (Whether they would run such a model, and whether it would push the unemployment rate significantly higher than currently predicted, Bullock did not say.)
Bullock’s efforts are perhaps more likely to dash hopes of early interest rate cuts as borrowers curb their spending. After all, “Jawboning” is the other tool – apart from the cash rate alone – in the RBA’s limited toolbox.
