The Reserve Bank governor, Michele Bullock, has warned some Australians may have to sell their homes in her first public comments on the state of the economy since the release on Wednesday of June quarter GDP figures.
Here are five key takeaways from Bullock’s speech on Thursday to the Anika Foundation fundraising lunch in Sydney.
Are higher interest rates 'smashing the economy'?
Bullock was asked several times whether the RBA’s 13 interest rate rises since May 2022 were “smashing the economy”, as the treasurer, Jim Chalmers, said in the lead-up to this week’s release of GDP numbers.
The governor dodged a direct answer but said: “He’s doing his job and I’m doing mine, I wouldn’t use those sorts of words.”
Her actual speech, titled The Costs of High Inflation, generally struck a tone defiant of some of the more gloom-and-doom commentary about how the economy was faring.
Yes, job vacancies and some other measures were worsening, but the labour market remained “strong”, she said. Hardly an economy, then, “without a pulse” or “at a standstill”, or “smashed” as some commentators have described it.
Some people will be forced to sell their homes
Philip Lowe, Bullock’s predecessor, once copped flak for saying people might need to get a flatmate or move back in with parents to cope with higher housing costs. (He later said the comments had been 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 strife after consecutive rate hikes.
On Thursday, the governor repeated that number for those borrowers “in a particularly challenging situation” where income is not keeping up with “essential spending and scheduled mortgage repayments”.
While households were getting by via cutting back on essentials, shifting to lower-quality goods and services, dipping into savings or working more hours, Bullock said that won’t always be enough.
“Some may ultimately make the difficult decision to sell their homes,” she said, noting lower-income borrowers were “over-represented in the group of people who are really struggling”.
Selling would, of course, be bad news for those involved. Bullock’s general gist, though, was that letting inflation stay higher for longer would deliver a worse fate for society’s battlers.
Interest rate cuts are unlikely in the 'near term'
If the economy’s not “smashed” and, as Bullock says, “only a small share of borrowers is currently at risk of falling behind on their mortgage repayments”, it follows that the RBA isn’t poised to cut its key cash rate.
As Bullock noted a month ago (after the RBA’s August meeting), market expectations that a rate reduction is imminent “don’t align” with her board’s thinking.
“Circumstances may change, of course, and if economic conditions don’t evolve as expected, the board will respond accordingly,” she said on Thursday. “But if the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term.”
There are only three board meeting left this year, with the first in 2025 scheduled for 17-18 February and then 31 March-1 April. Critics who think the RBA should be slashing interest rates now might see some irony in an April Fool’s Day rate cut were one to occur.
'Supply gap' remains
The RBA’s chief economist, Sarah Hunter, said last month “we’ve been in this sort of position where the economy is running a bit hot for a time now”, just as Bullock stressed the economy was running “hotter” than the central bank had predicted.
Those comments seem at odds with an economy that just completed its slowest financial year expansion rate (at 1.5%) since the 1991-92 year – excluding the pandemic.
But what Hunter and her boss have been trying to stress is that demand compared with supply was stronger than anticipated, say, three months ago. That imbalance needs to disappear if inflation (at least the portion caused by excess demand) is going to keep falling towards the RBA’s 2-3% target range.
As Bullock said on Thursday, “GDP itself was around about where we forecast”, even if some of its components (eg consumption) were weaker than the RBA had forecast.
“Part of monetary policy’s job has been to try and slow the growth of the economy because the level of demand for goods and services in the economy is higher than the ability of the economy to supply those goods and services,” she said. “So even though [the economy’s] slowing, we still have this gap.”
RBA’s forecasts might not be what it believes will happen
Much is made every three months of the RBA’s updated forecasts in its statement on monetary policy. (See August’s here.)
A quirky feature, though, is that they are based partly on where fickle financial markets think the RBA’s cash rate will go. In the case of the August forecasts, the RBA used cash rate forecasts as of 31 July (by coincidence the day June quarter CPI numbers landed).
Had the snapshot been taken on, say, 5 August, when the RBA was concluding its rates meeting, cash rate predictions were diving – along with global financial markets.
Does it matter?
In the RBA’s May forecasts, markets were betting the cash rate by December 2025 would be 3.9% (implying a good chance of two .25 basis-point rate cuts by then). The August forecasts assume the cash rate would have eased to 3.6% by end-2025 (or 100% chance of three cuts). The jobless rate would have peaked at 4.4% – assuming those excitable investors were right.
Bullock said the RBA “can do that exercise” of modelling what path it thinks its own cash rate will take. (If they did such a model run, and whether it would spit out a sharply different peak jobless rate than presently predicted, Bullock didn’t say.)
Perhaps Bullock’s efforts to douse hopes of early interest rate cuts make them more likely as borrowers restrain their spending. “Jawboning” is, after all, the other tool – beyond merely the cash rate – in the RBA’s limited tool box.
