In her first public statement on the state of the economy since the June quarter GDP figures were released on Wednesday, Reserve Bank of Australia Governor Michele Bullock warned that some Australians may be forced to sell their homes.
Here are five key takeaways from Bullock’s speech at a fundraising dinner for the Anika Foundation in Sydney on Thursday:
Are high interest rates ‘crashing the economy’?
Bullock was asked several times whether the RBA’s 13 rate hikes since May 2022 had “crashed the economy”, as Treasurer Jim Chalmers said ahead of this week’s GDP figures release.
The governor avoided giving a direct answer but said: “He’s doing his job, I’m doing my job. I don’t use those kinds of words.”
His actual speech, titled The Costs of High Inflation, struck a generally defiant tone, in contrast to more somber comments about the state of the economy.
Yes, job openings and some other measures were deteriorating, but the labor market remained “strong,” he said. At the time, it was not an economy that was “pulseless” or “stagnant” or “collapsed,” as some commentators described it.
Some people will have to sell their homes
Bullock’s predecessor, Philip Lowe, once faced criticism for suggesting that people might need to get a roommate or move back in with their parents to cope with rising housing costs. (He later said his comments were taken out of context.)
Bullock has followed a similar path, with the RBA predicting for some time that “around 5%” of owner-occupiers on variable-rate loans would be in relative distress after successive rate hikes.
The governor repeated that figure Thursday for borrowers in a “particularly challenging situation” whose income does not cover “essential expenses and scheduled mortgage payments.”
Bullock said households are getting by by reducing their basic needs, switching to lower-quality goods and services, using their savings or working longer hours, but he said that won’t always be enough.
“Some may eventually make the difficult decision to sell their home,” he said, noting that low-income borrowers are “overrepresented in the group of people who are really struggling.”
A sale would, of course, be bad news for those involved, but Bullock’s general point was that allowing inflation to remain high for longer would lead to a worse fate for society’s warriors.
Interest rate cut unlikely in the ‘short term’
If the economy has not “crashed” and, as Bullock puts it, “only a small proportion of borrowers are currently at risk of falling behind on their mortgage payments”, then it could be concluded that the RBA is not prepared to cut the key cash rate.
As Bullock noted a month ago (after the RBA’s August meeting), market expectations that a rate cut is imminent “do not align” with the board’s thinking.
“Of course, conditions can change and if economic conditions do not develop as expected, the board will respond accordingly,” he said on Thursday. “But if the economy generally develops as expected, the board does not expect to be in a position to cut interest rates in the near term.”
There are only three board meetings left this year, the first scheduled for February 17-18 and then March 31-April 1 in 2025. Critics who think the RBA should cut interest rates now may find it a bit ironic if it is an April Fools’ Day rate cut.
‘Supply gap’ continues
The RBA’s chief economist, Sarah Hunter, said last month that “we’ve been in a position where the economy has been running a little bit hotter for some time now”, while Bullock also said the economy was running “a lot hotter” than the central bank had forecast.
These comments appear to be at odds with an economy that, excluding the pandemic, completed its slowest fiscal year expansion rate (1.5%) since 1991-92.
But what Hunter and his boss are trying to emphasise is that demand relative to supply is stronger than was predicted, say, three months ago. That imbalance needs to be resolved for inflation (at least the part caused by excess demand) to continue to fall towards the RBA’s 2-3% target range.
As Bullock said on Thursday, “GDP itself has been running at the levels we had forecast,” although some of its components (such as consumption) were weaker than the RBA had forecast.
“Part of the role of monetary policy has been to try to slow the growth of the economy because the level of demand for goods and services in the economy is greater than the economy’s ability to supply those goods and services,” he said. “So, [the economy’s] “Even though it’s slowing down, we still have that deficit.”
RBA’s forecasts may not be as expected
The RBA’s monetary policy statement makes much of its quarterly updated forecasts. (You can read the August one here.)
But one interesting feature is that they are based in places with partly unstable financial markets. to think The RBA’s cash rate will go. In the case of the August forecasts, the RBA used its cash rate forecasts from July 31 (coincidentally the same day the June quarter CPI figures came out).
If this snapshot had been taken on, say, August 5, when the RBA was wrapping up its rate meeting, cash rate estimates would have been falling along with global financial markets.
Is it important?
In the RBA’s May forecast, markets were betting on the cash rate being 3.9% by December 2025 (implying a good chance of two .25bp cuts by then). The August forecast assumes the cash rate will fall to 3.6% by the end of 2025 (or a 100% chance of three cuts). The unemployment rate would peak at 4.4%, assuming these excited investors are right.
Bullock said the RBA could “do an exercise” of modelling what path its own cash rate would take. (Bullock did not say whether they would do such a modelling exercise and whether it would produce a very different peak unemployment rate to that currently forecast.)
Perhaps Bullock’s efforts to dampen hopes of an early interest rate cut are making them more likely as borrowers curb their spending. After all, “jawing” is just another tool in the RBA’s limited toolbox – beyond the cash rate.