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RBA Scare Tactics


Have we seen the last of RBA cash rate increases for 2023 and beyond?

“The new RBA Governor Michele Bullock did the smart thing and kept the pause on the cash rate, while warning us that we shouldn’t think rate rises are over” says Peter Switzer, renowned Australian business and financial commentator. He believes there is still a threat of future interest rate increases and he isn’t alone, but there are those that feel the worst is over.

The research from Roy Morgan confirms the need for a pause as they state that 1.57 million Australians (or 30.2% of mortgage holders) are at risk of mortgage stress. This is a considerable increase from May 2022 when the mortgage stress numbers were 759,000. This concerning increase in the mortgage stress felt by Australians is unsurprising after 12 interest rate increases in 17 months.

If rates go higher, the mortgage stress felt by all Australians could surpass the record high reached in the Global Financial Crisis, when the stress was felt by 35.6% of all mortgage holders.

The number of borrowers in the “extreme risk” category are sitting at a record high of 1,066,000 Australians which threatens to grow further before we factor in further rate increases. The RBA is aware of these numbers which is why many economists, such as those at the CBA and AMP, think we have reached the peak in rate increases.

The RBA is listening but has their gaze intently on the condition of the economy and their desire for inflation to sit within the 2-3% band. This inflation target and the economy’s refusal to slow down is why economists are torn in their views, and why Peter Switzer is tempering expectations that there could be further increases.

Renowned builder/developer Tim Gurner recently said that the 12 rate increases to date and the fear of at least another rate increase are meant to do the following:

  1. Scare us into less spending and more saving.
  2. Stop bosses from hiring people, so the RBA wants to see job losses.
  3. See a fall in job ads.
  4. Smash retail sales.
  5. Make home prices fall.
  6. Kill consumer and business confidence.
  7. Make it hard for businesses to set higher prices, which effectively brings inflation down.

The price of oil is increasing which makes the global fight against inflation harder for all nations, but a shrinking, scared global economy, with a lot less demand, will help offset the rising oil price. The same goes for electricity and power costs.

The other 10 key economic metrics that the RBA cannot stop staring at for the moment while they are listening to nearly a third of all Australian mortgage holders suffer, are the following:

1. Retail sales

Retail trade rose by 0.2% in August 2023, to be just 1.5% higher through the year. The ABS noted that the trend annual growth rate of 1.3% is the lowest in the history of the series, dating back to 1982!

2. Home lending

New housing lending rose by a stronger‑than‑expected 2.2% in August, driven by owner‑occupiers.

3. Credit growth

The annual rate of credit growth slowed further to 5.1%, the slowest run rate since September 2021.

4. Job ads

Job vacancies fell by a very large 8.9% over the three months to August 2023.

5. Job creation

Employment surged by 64,900 in August, rebounding from a 1,400 fall in July. Only 2,800 of the jobs created in August were full time. This bounce reflected a recovery from seasonal effects after the timing of school holidays impacted July.

6. Inflation

Consumer prices rose by 0.8% in August, with the annual rate rising to 5.2%, but core inflation continued to fall, highlighting the impact from volatile items.

7. Wages

Wages rose by 0.8% over the past quarter and annual wages growth decelerated to 3.6%.

8. Consumer sentiment

The Westpac-Melbourne Institute consumer sentiment index fell by 0.4% to 81 in August 2023 and as the CBA reported: “The index remains in deeply pessimistic territory”. The move lower is somewhat surprising given the RBA has held interest rates steady in two consecutive meetings.

9. Business confidence

NAB business confidence remains weak, at 2 in July, up from a revised minus 1 in June, weighed down by the retail sector, which is feeling a heightened degree of pain at the moment.

10. Home prices

Home prices are now 5.1% higher than a year ago. Prices have increased by 7.9% since the beginning of this year. 

It’s a mixed bag which is why the RBA held steady with the cash rate but continues to watch the numbers intently given the continued lag from previous increases. Core inflation is heading in the right direction but the volatile items on the fringe continue to be a thorn in the side of the RBA, impacting all Australians.

Therefore, the RBA is using the threat of further cash rate increases as a scare tactic (fitting considering Halloween is around the corner) to try and coerce the desired result. But if the fear of the monster under the bed isn’t enough to slow down the economy, the monster will emerge from under the bed in the form of a cash rate increase which isn’t what any Australian mortgage holder wants. It’s enough to keep you up at night.