Australian homeowners should expect the Reserve Bank to apply two further interest rate hikes – one ahead of Christmas and again in February, says Bendigo and Adelaide Bank chief economist David Robertson.
Robertson (pictured above), who on Friday, November 4, released his monthly report card into the Australian economy, said this would take the official cash rate to a “neutral setting” in early 2023.
“The RBA delivered its seventh consecutive rate hike this week, adding to the record cumulative increase in the official cash rate this year, but thankfully again only 25 basis points, as forecast last month,” Robertson said.
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“We expect a further increase of this size in December and February, taking the official cash rate to 3.35%, or a ‘neutral’ setting’,”.
Robertson said the logic behind the 0.25% increase (in contrast to the US and UK hiking rates 0.75% this week) centred on the lag between rate hikes and seeing impact on the real economy, the likely decline in inflation next year as supply chains gradually repair, and the fact that the RBA meets monthly, unlike most other central banks.
“The key question ahead for 2023 is whether a neutral rate will be sufficient to tame inflation, particularly after last week’s CPI figures showed a rise in core inflation to 7.3%, more than double target at 6%.”
Robertson said that while he expected a more restrictive RBA cash rate would pose stronger headwinds to some asset values, forecasts point to a plateau in rates next year, in the mid threes.
“Monetary policy will do its part in tackling inflation but fiscal policy faces challenges via structural deficits ahead due to an ageing population and a lack of productivity growth,” he said.
The bank’s chief economist said government net debt as a percentage of GDP was very low as detailed in the October budget at 22.5%, which kept Australia’ coveted AAA credit rating safely intact.
“Deficits are forecast to build from financial year 2025, however suggesting the nation has around three years to lift productivity via structural reform to address these challenges ahead.”
Property values
Robertson said residential property values fell another 1.2% nationally in October, 6.5% from their peak in capital cities, and 5% for regional property.
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“Once again there are huge variances by location, but on average values are down 6% from their peak, having risen just over 28% during the pandemic.
“This downturn obviously has further to run but is being helped by the strong jobs market and the likely pickup in net migration.”
Equity markets
Robertson said markets were trying to look on the bright side here and overseas, with investors weighing up the certainty of further rate hikes against the hope that tightening cycles were closer to topping out, with the latest corporate earnings generally beating expectations.
“Our bear market for stocks hasn’t been as dramatic as many elsewhere, so like many aspects of the last few years not only is volatility high, but variances between and even within sectors are remarkably wide,” he said.
“Once again, the fate of asset values is at the mercy of just how high rates will reach, as well as which sectors, businesses and asset classes can best cope with higher rates.”
