The bank's chief economist still expects the RBA to raise rates sooner than announced – but he says there's a ceiling on those hikes
Westpac chief economist Bill Evans recently predicted that the Reserve Bank of Australia would hike interest rates at least a year earlier than the central bank’s own prediction of 2024 “at the earliest.” However, Evans now says that high household debt will limit any future rate hikes.
Evans said in a report on Friday that the official cash rate – currently at a record-low 0.1% – would peak at 1.25% in 2024 thanks to the “sensitivity of Australia’s household sector.”
Evans said that a rise in the cash rate to 1.25% would likely cause the household mortgage debt servicing ratio to approach the peaks it hit in 2010 and 2018, The Australian reported.
“Respectable cases could be made for peaks of 1 per cent and 1.5 per cent [official cash rate], but on this metric it would only be appropriate for RBA to go beyond 1.5 per cent if there was a significant risk of inflation overshooting or labour markets becoming intolerably tight,” Evans wrote in the report.
Several economists have predicted that the central bank would be forced to raise rates earlier than intended after a May labour force report showed an unexpected drop in the unemployment rate to a pre-COVID low of 5.1%, The Australian reported.
Gareth Aird, head of Australian economics for Commonwealth Bank, said last week that he expected two consecutive rate hikes in November and December of next year, taking the cash rate to 0.5%. Aird expected the cash rate to hit 1.25% by September 2023. Earlier this month, ANZ projected that rates would rise in 2023.
Read more: Brace for a rate rise – and soon – says CBA
Evans said that while recent periods of rate-cutting by the RBA have tended to last for “very long periods,” recent tightening cycles tended to be “much more concentrated.” However, he said that the “upside limit” to Australia’s tightening cycle is “likely to be determined by the household sector’s sensitivity to rising rates given Australia’s high levels of household debt.”
According to Evans, indicators of “stress levels for household borrowers” dictate that a cash rate of 1.25% represents “the limit above which interest rates would be contractionary through their impact on household finances.”