The Reserve Bank of Australia has slammed on the brakes harder than it has for 28 years, and now anticipates over the next two years the economy will grow slower than it ever has in a non-recessionary period. That is bad news for people’s standard of living.
Back in April the average home loan rate was 2.65%, the cash rate was at 0.1% and monthly repayments on a $500,000 home loan were $2,015.
And yet, just four months later, the cash rate is up to 1.85% and those monthly repayments are now $2,504.
Just a lazy 24% increase.
In its April monthly statement, the RBA said that while inflation was rising “growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target”.
This was in line with what the RBA had long been saying.
A year ago, the bank stated it would “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024.
“Meeting this condition,” the statement concluded, “will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”
And now the cash rate has risen 175 basis points in four months – the fastest increase since 1994:
If the graph does not display click here
So that means wages are now “materially higher” than they were a year ago?
Well … sort of.
In Tuesday’s statement, the governor merely noted that the bank’s “liaison program and business surveys continue to point to a lift in wages growth from the low rates of recent years as firms compete for staff in the tight labour market”.
Cripes.
If all you can say when unemployment is 3.5% is that there has been “a lift in wages growth” from the record low growth of the previous years, then clearly the labour market is broken.
But with inflation growing at 6.1% the RBA has slammed on the monetary policy brakes.
Just how hard has the bank gone?
This is already the fastest rates have initially gone up in 12 months since the late 1980s.
And more rises are on the way:
If the graph does not display click here
But the circumstances have changed.
In 2007 for example, when the RBA increased rates the standard variable rate went from 8.1% to 9.6%.
If the graph does not display click here
Back then the average new mortgage was around $250,000. It meant mortgage repayments increased $278 a month from $1,847 to $2,215 – a 15% increase.
Right now the market is factoring in another 135 basis point rise by next March.
If that happens the standard variable rate would have gone from 4.52% to 7.62%.
The actual average rate held by mortgage holders is lower than the “standard rate”, but a 310 basis points rise from the April average of 2.65% would still see it go to 5.75% by March.
That would cause monthly repayments on a $500,000 loan to go from $2,015 to $2,918 – a 45% increase.
Little wonder the market is getting nervous about its previous rate rise predictions and is now predicting rates will have to be cut next year.
Six weeks ago, the market priced in a cash rate of 4.25% by May next year; now it expects rates to top out at 3.2% before falling to 2.85%:
If the graph does not display click here
A 4.25% cash rate would in my view absolutely cause a recession. Could you imagine what home loan repayments rising 60% in one year would do to the economy?
I also think the current expectation of 3.2% is too high and would more likely than not produce a recession. I am much more in line with the Commonwealth Bank’s estimate of a 2.6% peak.
But even still that would have a massive impact on the economy.
The Reserve Bank already expects the economy to grow by just 1.75% next year and in 2024.
That is truly dire.
Since 1980 there have only been six calendar years with GDP growth below 2%. If the RBA is right this would be the first time since the 1990s recession it has happened two years in a row:
If the graph does not display click here
That might not be a recession, but it would not be anything good.
GDP growth is closely linked with unemployment. As a rule, over the past 40 years to keep the unemployment rate stable GDP needed to grow at least 2.75%:
If the graph does not display click here
Two years of 1.75% growth would likely see unemployment rise – the RBA expects to 4%. But as unemployment rises, wages growth falls, all at a time where the RBA is also estimating inflation growth of “a little above” 4% in 2023 and “around” 3% in 2024.
If the graph does not display click here
Given that at this current state of 50-year low unemployment we are only seeing “a lift in wages growth” above record lows, that does not bode well for people’s standard of living.
