“The sector as a whole has large liquidity cushions, most households have substantial equity in their housing assets and lending standards in recent years have been more prudent and built larger cushions for increases of interest rates,” he said this week.
Bullock explained that “many borrowers are already making repayments far in excess of what is required”, with much of the mortgage debt in the hands of wealthy households. The RBA is also comforted by the fact that “those with very low fixed rate loans have time to prepare for higher interest rates”.
Hammered homes
I would have rephrased that as the crowd of oblivious borrowers who were frustrated by the RBA’s public pledge not to raise rates until 2024 (at the earliest) are being warned that their mortgage repayments will more than double next year or two, thanks to what will soon be at least 1.75 percentage points of interest rate hikes in just three months.
In 2020 and 2021, the RBA relentlessly advised households and businesses to borrow as much as possible on the basis of a pledge not to raise rates for years, only to renege on that promise in 2022 and then embark on a crazy-aggressive tightening cycle that is destroying the value of your most valuable asset (and more).
The RBA counters that it never “promised” not to raise rates. He certainly “pledged” not to raise them, and he promised this by explicitly setting the interest rate on the 2024 public bond at the same 0.1 percent level as his overnight cash rate. And he spent billions defending the promise, until he suddenly didn’t last October.
The RBA’s confidence in the strength of the domestic sector’s ability to withstand interest rate shocks seems too good to be true. It is, in fact, a classic ex post facto rationalization of a decision he has made to impose excessive rate increases on the economy based on forecasts that are not worth the paper they are written on. (Even the RBA admits it cannot predict its next step, which Governor Philip Lowe has described as “embarrassing”).
The RBA always deploys these “narratives” to justify decisions. And they are always faithfully recycled by the media, who may be obliged to the RBA to access the information.
Massive increase
There was a graphic in the Deputy Governor’s recent speech that really betrayed the vulnerabilities of the RBA’s model. Martin Place talks about how many Australians are ahead of their mortgage payments and have built up substantial reserves to protect themselves against rate rises.
“Data suggests that more than a third of variable-rate borrowers have already made average monthly loan payments (including irregular payments to redraw and balance accounts) sufficient to satisfy [a 3 percentage point increase] in required repayments,” Bullock explained. “In other words, there’s limited impact on these borrowers.”
The scariest interpretation of the same chart is that 40 percent of all borrowers will face a massive increase in their monthly mortgage repayments that exceed 30-40 percent. You have a similar sense of this fragility in other data.
Westpac recently revealed that while 29 per cent of all its borrowers are at least a year behind on their required payments, a staggering 50 per cent are less than a month behind. It is a classic bimodal distribution between the haves and the have-nots.
CBA economists show that once you account for both interest and principal repayments, raising the RBA’s cash rate to 2.5 per cent would return household debt servicing costs to 2008 levels , when the cash rate was 7.25 percent (and official mortgage rates were north). of 9 percent).
This potentially makes a mockery of the RBA’s claim that a cash rate of 2.5 per cent would be around the “neutral” level which is neither contractionary nor expansionary for growth.
Reduction in consumer confidence
Because it doesn’t fit the narrative, the RBA ignores data showing that consumer confidence has plummeted to levels last seen during the pandemic shock of March 2020 and the global financial crisis. The concern should be that consumer spending, one of the most important sources of growth, is highly correlated with confidence.
Unsurprisingly, the CBA data indicates that household spending is slowing despite high inflation, which would normally increase the dollar value of spending over time. There are also some early signs that businesses are feeling the pinch, with NAB’s measure of business confidence falling sharply from recent peaks.
Finally, there is the CBA wage data which, like the official wage price index, suggests that labor cost growth remains modest at around 2.5 per cent a year. CBA information tracks actual wages paid into 300,000 bank accounts.
The RBA has stated that for Australia to keep inflation within its target band of 2% to 3%, it requires wage growth of 3% to 4% a year. While there is no clear evidence that the Australian economy meets this test, the RBA is blindly raising rates like an inflation freak.
RBA errors
The bewilderment that characterizes the RBA is evident everywhere. There was the error in the RBA’s statement after its last board meeting when the central bank incorrectly claimed it was removing the cash rate cuts it had implemented after the pandemic, despite that the cash rate was already above its pre-pandemic level of 0.75. per cent.
Today’s cash rate of 1.35 percent is above the June 2019 level (nine months before the pandemic). However, Bullock maintains that the RBA is only unwinding the stimulus it had put in place after the pandemic.
“The thing is, like every other country, we’re coming out of emergency or extraordinarily low interest rates in this country,” Bullock said. “Much, much lower than you would have in a normal, strong economy. And so at least the first task is to try to remove some of that monetary stimulus, so that’s what we’re trying to do.”
The problem with this logic is that the RBA’s cash rate is almost double its pre-pandemic level. After the minimally expected increase of 0.5 percentage points next month, the RBA’s new cash rate of 1.75 per cent will be the highest it has been since July 2016.
Asked again about this during the week, Bullock replied: “We are, as I said, at extraordinarily low interest rates, and we have to get closer to some kind of concept of what you might call” interest rates. neutral’, meaning it is neither expansive nor contractive.”
The RBA’s intellectual contradiction was nested in this later statement: “We don’t know where it is particularly, but we know it’s a bit higher than where we are.”
How can the RBA not know where the neutral rate is, but at the same time express confidence that it is “somewhat higher” than 1.35 per cent?
The RBA seems to have lost sight of the impact of the amount of debt on the economy. While interest repayments as a proportion of disposable household income may seem low, principal repayments are at their highest levels ever. And borrowers pay both.
One cannot be examined in isolation from the other. Therefore, we are concerned with total debt service costs. According to CBA data, the current cash rate puts total household debt payments as a share of income at higher than normal levels. This probably explains why many banks, including CBA and Westpac, believe the RBA’s ‘neutral’ cash rate could be as low as around 1.5 per cent.