Monetary policy isn't slowing economy and stopping inflation
Next week’s Melbourne Cup Day won’t prove lucky for many borrowers who are likely to face a cash rate hike, says macroeconomist Warren Hogan (pictured).
Hogan is the principal of advisory form EQ Economics and the economy and markets lead at savings platform Earnr and has 30 years of experience in analysing and forecasting the Australian economy.
He said Australian homeowners could expect the RBA to reveal a 25-basis point rise at its November 7 meeting.
“Unfortunately, the inflation numbers last week were just too high, well above what the RBA had been expecting, and highlight that our monetary policies are just not getting the job done on slowing the economy and getting rid of this inflation,” Hogan said.
“I think the RBA’s desire is to raise rates to a level that will slow the economy and start to see inflation come down.”
While there has been some talk of future rate reductions by some economists and commentators, Hogan cautions that this won’t happen any time soon.
“The problem we’ve got is that they may actually have to raise rates by more than anyone expected just because the economy's proving resilient,” Hogan said.
Don’t focus on when RBA might lower cash rate
Hogan said it was wrong to focus on when the RBA might drop interest rates, even though it’s “obviously something people want to hear”, at a time when some people were under tremendous economic pressure.
“I think there's been plenty of time now, especially this year, for those who were simply holding too much debt, or too big a mortgage, to make those adjustments which would ultimately mean selling their property or selling other assets to reduce the size of their mortgage,” he said.
“But the reality is that the housing market has been improving this year. We're still writing more mortgages every month than we did at any time prior to the pandemic.”
He said while some sectors of the community might be stressed about higher interest rates, there was clearly a large number of people, in major capital cities in particular, who were still able to pay close to record prices for property.
Regional property market remains steady
Hogan said expensive property markets in regional NSW and Victoria had stabilised this year and were only eight to 10% off “the ridiculously high prices that we saw in the pandemic”.
According to Hogan, contrary to what some feared, there hadn’t been a big wave of people moving back to the major cities from regional areas.
“I think that was always the risk for regional markets … [however mostly] the flow of people from Sydney and Melbourne to the regional areas has continued, although not at the same pace as the pandemic.”
Hogan said that fact that flexible work conditions had largely been maintained, had helped stop people being forced to return to city areas.
“It’s not about working from home two days a week, it's about people actually having jobs where they don't have to be in a city office,” he said.
Hogan said immigration and baby boomers who chose a regional lifestyle over city life would help uphold the prosperity of many regional areas.
“If you’re in Sydney and Melbourne and you retire, there are some beautiful places to live in regional Australia. They're expensive but they're cheaper than Sydney.”
Economic conditions remain steady, for now
Looking ahead, Hogan expects economic conditions over the next couple of months to be similar to what we’ve already seen, despite the potential of another rate rise or two.
He said while the economic pressures of more rate rises could force the hands of some borrowers to sell their houses and get rid of their mortgages, it was only “a very, very small proportion of the community”.
“But I do think it'll eventually bite – we are seeing consumer belt-tightening already,” Hogan said.
“So, it's just a grind that we're going to see continuing and it's going to continue to put pressure on households and businesses and this is going to get worse before it gets better.
“There's no easy way out of this … it's about deciding on the least bad route.”
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