RBA blindly raises interest rates 'like an inflation madman'

“The sector as a whole has a large liquidity buffer, most households have substantial equity in their housing assets, and lending standards have in recent years been more cautious and have built a larger buffer for rate hikes,” he said this week.

Bullock explains that “many borrowers have made payments well above what was requested”, with much of the mortgage debt held by wealthy households. The RBA also takes comfort in the fact that “those with very low fixed-rate loans have time to prepare themselves for higher interest rates”.

Hammered household

I will reiterate that as droves of unwitting borrowers have been embarrassed by the RBA’s public commitment not to raise rates until 2024 (at the earliest) noticed that their mortgage payments will more than double in the next year or two, thanks to what that would soon be at least a 1.75 percentage point rate hike in just three months.

In 2020 and 2021, the RBA relentlessly advised families and businesses to borrow as much as possible based on a commitment not to raise interest rates for years, only to first break that promise in 2022 then start a cycle of insanely-aggressive tightening that destroys value. their most valuable asset (and more).

The RBA denied it never “promised” not to raise interest rates. It is of course “committed” not to raise it and keeps that promise by explicitly setting the 2024 government bond interest rate at the same 0.1 percent level as its overnight rate. And it cost billions to defend that promise – until suddenly it didn’t happen last October.

The RBA’s belief in the strength of the household sector’s ability to withstand interest rate shocks sounded too good to be true. Actually, it’s a classic ex post facto rationalization of the decision that has been made to impose super-sized tariff increases on the economy based on estimates that are not worth the paper they are writing. (Even the RBA admits it can’t predict its next move, which governor Philip Lowe described as “embarrassing”.)

The RBA always launches this “narrative” to justify decisions. And they are always faithfully recycled by the media, which can be the responsibility of the RBA for information access.

Massive upgrade

There’s one chart in the vice governor’s recent speech that really shows the vulnerabilities in the RBA model. Martin Place talks about how many Australians have excelled in their mortgage payments and have built substantial buffers to protect against rising interest rates.

“Data shows that more than a third of variable rate borrowers have made average monthly loan payments (including irregular payments to redraw and offset accounts) sufficient to meet [a 3 percentage point increase] in the required payments,” Bullock explained. “In other words, there is a limited impact on these borrowers.”

A frightening interpretation of the same graph is that 40 percent of all borrowers will face a large increase in their monthly mortgage payments beyond 30 to 40 percent. You get the same feeling about this fragility in other data.

Westpac recently revealed that while 29 percent of all of its borrowers are at least a year ahead of required payments, a staggering 50 percent are less than one month ahead. This is the classic bimodal distribution between the rich and the poor.

CBA economists point out that once you factor in interest and principal payments, raising the RBA rate to 2.5 percent would return the cost of servicing household debt to levels around 2008 when interest rates were 7.25 percent (and official mortgage rates were north of than 9 percent).

This potentially mocks the RBA’s claim that the 2.5 percent cash rate will be around a “neutral” level that is neither contractionary nor expansionary for growth.

Decreased consumer confidence

Because it doesn’t fit into the narrative, the RBA is ignoring data showing that consumer confidence has plummeted to levels last observed during the shocks of the March 2020 pandemic and global financial crisis. The concern should be that consumer spending, one of the most important sources of growth, is highly correlated with trust.

Not surprisingly, CBA data shows that household spending is slowing despite high inflation, which typically increases the dollar value of spending over time. There were also some early signs that businesses were feeling the pinch, with the NAB’s measure of business confidence falling sharply from recent peaks.

Lastly, there is the CBA wage data which, like the official wage price index, shows labor cost growth remains modest at around 2.5 percent annually. CBA Information tracks actual wages paid to 300,000 bank accounts.

The RBA has claimed that for Australia to maintain inflation within its target range of 2 per cent to 3 per cent, wage growth of 3 per cent to 4 per cent per year is required. While there is no clear evidence that the Aussie economy meets this test, the RBA is blindly raising interest rates like an inflation maniac.

RBA error

The discmbobulation that characterizes the RBA is seen everywhere. There was an error in the RBA’s statement after its last board meeting when the central bank wrongly alleged that it was scrapping interest rate cuts it had made in the aftermath of the pandemic – even though interest rates were already above their pre-pandemic level of 0.75 percent.

Today’s 1.35 percent cash rate is above the June 2019 level (nine months before the pandemic). But Bullock argues that the RBA is simply letting go of the stimulus it has done after the pandemic.

“The bottom line is, like every other country, we’re coming out of a state of emergency or very low interest rates in this country,” Bullock said. “Much, much lower than you would have in a normal, strong economy. So at least the first task is to try and remove some of that monetary stimulus, so that’s what we’re trying to do.”

The problem with this logic is that the RBA’s cash rate is almost double the pre-pandemic level. Following a minimum 0.5 percentage point increase expected next month, the RBA’s new 1.75 percent interest rate will be the highest since July 2016.

Asked about this topic again during the week, Bullock replied: “We are at, as I said, very low interest rates, and we have to make it into some kind of concept of what you would call ‘rate neutral’, which means not expansive. or contraction.”

The RBA’s intellectual contradiction is nested in the following statement: “We don’t know where it is exactly, but we know it’s a little higher than where we are.”

How could the RBA not know where the neutral level is, but with the same breath express confidence that it is “slightly higher” than 1.35 percent?

The RBA seems to have forgotten the quantum impact of debt on the economy. While interest payments as a share of household disposable income may appear low, principal payments are at their highest ever. And the borrower pays both.

You cannot check one separately from the other. Therefore we care about total debt payment costs. Based on CBA data, the current cash rate puts total household debt payments as part of income at a higher than usual level. This may explain why many banks, including the CBA and Westpac, believe that the RBA’s “neutral” cash rate can be as low as around 1.5 percent.

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