Economics and Banking – Page 12 – Digital Finance Analytics (DFA) Blog

The RBA’s Third Phase Of Tightening, And What Happens Next…

The Reserve Bank of Australia’s (RBA) Assistant Governor (Financial Markets), Christopher Kent, gave an Address to Bloomberg on Wednesday where he expressed why the RBA is reluctant to lift the official cash rate further.

https://www.rba.gov.au/speeches/2023/sp-ag-2023-10-11.html

The RBA is in its “third phase” of monetary policy tightening as it assesses the impact of interest-rate rises to date, he said. The current stage is “an opportunity to see how the economy and how the data is evolving,’’ he said, reiterating that further rate increases may still be needed.

Much of the presentation concerned the lags as monetary policy takes effect. Basically, the RBA expects further impacts on the economy as the lagged effects of the 4.0% of monetary tightening delivered over the past 18 months flows through.

A ‘built in’ monetary tightening in Australia is one reason why the RBA is reluctant to lift the official cash rate further. Australia’s monetary system will tighten on its own as more pandemic era fixed rate mortgages reset from rates of around 2% to variable rates of more than 6%.

But that means those with big mortgages are being worst hit, while others are still enjoying their savings buffers and will continue to spend.

And the question will be, whether the current settings will crush inflation, or whether more rate hikes are needed. As I discussed the other day, there are significant pressures on the RBA to lift further, and some economists are expecting another one or two hikes into 2024.

Either way, there is little rate relief on the horizon for the next year plus.

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The Mortgage Stress Default Disconnect

According to the AFR, Australia’s red-hot jobs market is preventing the country’s most indebted borrowers from falling behind on their home loan, as internal Reserve Bank research reveals nearly one in five borrowers may be in mortgage stress.

While unemployment nationally was 3.7 per cent in August, unemployment among homeowners was likely “almost non-existent”.

But markets ascribe a three-in-five chance the RBA board will deliver one more rate rise by the end of the year, amid concerns about persistently high inflation in the services sector and a stubbornly strong jobs market.

Strong employment growth and nominal wage increases have insulated borrowers from some of the financial pain caused by high interest rates.
About 18 per cent of loans across the country have a high repayment burden, defined as spending more than 30 per cent of household income on paying down a mortgage, according to internal RBA research released under Freedom of Information laws.

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Bond Market To RBA: Put Rates Higher!

A surge in long-term bond yields has driven both the Australian dollar and the local sharemarket to an 11-month low earlier in the week, and may force Reserve Bank of Australia governor Michele Bullock to deliver further cash rate rises, economists say.

Adding to expectations that the RBA may deliver one further interest rate rise is an increase in long-dated yields, both locally and abroad.

Long-term US bond yields have galloped higher since July alongside strong economic data and an unexpected increase in planned bond issuance to finance the US government’s yawning budget deficit, which Fitch expects to be 6.3 per cent of GDP this year.

http://www.martinnorth.com/

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Is Inflation Rising From Its Slumber?

New US inflation numbers came out, and they included at least some reasons for concern. The headline figure deteriorated for the first time in months rising 0.6% in the month and 3.7% year on year. The broadest picture, breaking down into food, energy, and core services and goods excluding food tells the story.

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The Limitations Of Monetary Policy (And What Lowe Does Next…)

Last week, the departing RBA Central Bank Governor Philip Lowe used his final public comments given at the Anika Foundation to defend his more controversial comments, saying while some of his explanations had “missed the mark” the media also had a responsibility to avoid “clickbait”.

But he also highlighted the limitations of monetary policy and suggested that fiscal and monetary policy could be better connected than today, something which should have been considered by the recent RBA review.

So today we look at what he said, and will also touch on where Central Bank Governors go after they leave their post.

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Will Inflation Come Roaring Back?

In recent months Central Banks have been able to say inflation was falling back towards their targets. But, this had little to do with their rate hiking cycle, and more to the adjustment in supply-side prices, especially energy. The so-called base effects where big lifts in inflation months ago dropped out helped the narrative. But the inflation battle is far from over.

This is because ahead the base effects will reverse. And then we must consider the recent spike in energy prices, plus higher wages flowing through to the services sector of the economy. So overall, I think it is likely that inflationary pressures will re-accelerate in the months ahead. In the US as oil and gasoline continue their upward trend, CPI could potentially rise back above 5.1%-5.5% by year-end. Therefore, inflation levels could remain elevated for a more extended duration than is presently anticipated by financial markets.

http://www.martinnorth.com/

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