Commonwealth Bank of Australia: Markets set prices amid housing crisis
By James Glynn
SYDNEY – Australia’s biggest mortgage lender is warning that if financial markets are right, the Reserve Bank of Australia is expected to raise official interest rates to around 2.50% over the next 15 months, this will push the cost of servicing a home loan at record levels.
Gareth Aird, head of the Australian economy at the Commonwealth Bank of Australia, doesn’t think that will happen, noting that the RBA has said it plans to raise the official exchange rate only to a high of 1.25% , after starting to raise interest rates in June. This year.
“It is possible, however, that the RBA could take its policy into contractionary territory; either intentionally to put downward pressure on inflation, or inadvertently if the RBA’s assessment of neutral is higher than ours.” , Mr. Aird said.
ABC research indicates that a cash rate of 2.50% would be “deeply restrictive” and cause mortgage payments as a share of household disposable income to hit an all-time high, he said.
As the CBA predicts the worst will be averted, financial markets are betting that the RBA will take the cash rate to 2.5% by June next year from a record high of 0.10% now, so that consumer prices threaten to rise at an unprecedented rate. since the 1980s.
Worse still, financial markets see the cash rate peaking at 3% over the next two years.
RBA Governor Philip Lowe recently dropped his earlier forecast that an interest rate hike could be delayed until 2024. He now says an interest rate hike this year is ‘plausible’ .
There has been a strong shift among economists towards the idea that the RBA will raise interest rates mid-year if the next round of inflation and wage data shows consumer prices have jumped. .
Mr Aird said on Tuesday that the Australian government’s budget for the year to June 30, 2023 will help determine when and by how much the RBA will raise interest rates.
If fiscal parameters remain too loose, it is likely that the RBA will have to work harder over time to contain inflation, he said.
“A looser fiscal policy than we currently expect increases the likelihood that the RBA will drive the cash rate to a contraction level,” Aird said.
Write to James Glynn at james.glynn@wsj.com