Introduction to the Reserve Bank’s Latest Assessment
The Reserve Bank of Australia (RBA) has released its latest quarterly Statement on Monetary Policy (SMP), which provides an assessment of the current state of the economy. As expected, the RBA has kept interest rates on hold, but there is both good and bad news in the report.
The Good News
The RBA predicts that Australia’s economy will continue to grow at a rate of about 2 percent per year for the foreseeable future. This growth is expected to be driven by housing investment, with forecasts upgraded again due to the federal, state, and territory governments’ push to build 1.2 million new homes by the end of the decade. The bank also expects the unemployment rate to remain steady at around 4.5 percent, although many economists are skeptical of this forecast. Additionally, worker productivity is improving more quickly than previously expected, although it is still at levels that would be considered mediocre by historical standards.
The Bad News
Despite solid economic growth, stable unemployment, and rising productivity, the RBA has not meaningfully upgraded its wage growth forecasts. In fact, the bank expects inflation to remain higher for longer, which could lead to a decrease in workers’ purchasing power. The latest annual jump in consumer prices is expected to top out at 3.7 percent next June, compared to an expected 3 percent rise in the wage price index. This means that workers may see their purchasing power fall again next year, having only just started to recover from the post-COVID cost-of-living crisis.
The Impact on Interest Rates
The RBA’s decision to keep interest rates on hold has led to a decrease in market forecasts for rate cuts. The cash rate is now expected to bottom out at 3.3 percent sometime next year, which is higher than previous expectations. Some economists believe that the RBA’s work is done and that there will be no more rate cuts. In fact, the median expectation of market economists is for no cuts through to the end of next year. HSBC’s Paul Bloxham is one of those who thinks the RBA is finished cutting, predicting that the next move will be up, but not until 2027.
What This Means for Borrowers
While the RBA’s decision may not be good news for workers, it does have some positive implications for borrowers. Competition between banks and cheap money on global markets has seen spreads on variable-rate mortgages compared to the cash rate fall to about 0.65 of a percentage point below pre-pandemic levels. This means that the current cash rate of 3.6 percent is resulting in the same mortgage rates as a cash rate of 4.25 percent prior to 2020. However, this also means that it is hard to see these spreads going anywhere but up, as banks look to improve profitability or if markets suddenly decide to increase risk premiums to more normal levels.
Conclusion
In conclusion, the RBA’s latest assessment of the economy provides a mixed bag of good and bad news. While the economy is expected to continue growing, and housing investment is on the rise, wage growth forecasts have not been upgraded, and inflation is expected to remain high. The impact on interest rates is also significant, with many economists predicting that the RBA’s work is done and that there will be no more rate cuts. For borrowers, the current low mortgage rates may be as good as it gets, at least for the next couple of years. Overall, the RBA’s report provides a nuanced view of the current state of the economy and highlights the challenges that lie ahead.
