Reserve Bank Governor Michele Bullock has warned that some Australians may have to sell their homes, her first public comment on the state of the economy since the release of June quarter GDP figures on Wednesday.
Here are five key points from Bullock’s speech at the Anika Foundation fundraising lunch in Sydney on Thursday.
Are Higher Interest Rates ‘Destroying the Economy’?
Bullock was asked several times whether the RBA’s 13 rate hikes since May 2022 were “ruining the economy”, as Finance Minister Jim Chalmers said in the run-up to this week’s GDP figures.
The governor avoided a direct answer, but said: “He does his job and I do mine, I wouldn’t use those kinds of words.”
Her speech, entitled The Costs of High Inflation, was generally in a tone at odds with the previously gloomy comments about the economic situation.
Yes, job openings and other measures worsened, but the labor market remained “strong,” she said. Hardly an economy, then, “without a pulse” or “stagnant,” or “crushed,” as some commentators have described it.
Some people will be forced to sell their homes
Philip Lowe, Bullock’s predecessor, was once criticized for saying that people might need to find a roommate or move back in with their parents to afford higher housing costs. (He later said the comments had been taken out of context.)
Bullock followed a similar path. The RBA has estimated for some time that “around 5%” of homeowners with variable rate loans would face relative hardship following successive rate rises.
On Thursday, the governor reiterated that number for those borrowers “in a particularly challenging situation” where incomes are not keeping pace with “essential expenses and scheduled mortgage payments.”
While households have gotten by by cutting back on basic necessities, switching to lower-quality goods and services, dipping into their savings or working more hours, Bullock says that won’t always be enough.
“Some will ultimately make the difficult decision to sell their home,” she said, noting that lower-income borrowers are “overrepresented in the group of people who are really struggling.”
Selling would of course be bad news for those involved. Bullock’s general point, however, was that allowing inflation to continue would result in a worse fate for society’s fighters.
Rate cuts are unlikely in the ‘short term’
If the economy is not “crushed” and, as Bullock says, “only a small proportion of borrowers are currently at risk of falling behind on their mortgage payments”, then it follows that the RBA has no plans to cut its key cash rate.
As Bullock noted a month ago (after the RBA’s August meeting), market expectations that a rate cut is imminent are “not consistent” with the thinking of its board.
“Circumstances can of course change, and if economic conditions do not evolve as expected, the administration will respond to that,” she said Thursday. “But if the economy evolves broadly as expected, the administration does not expect to be able to lower rates in the short term.”
There are only three board meetings left this year, with the first in 2025 scheduled for 17-18 February and then 31 March-1 April. Critics who argue the RBA should cut rates now might quip about an April Fool’s joke if it were to happen.
‘Supply gap’ persists
The RBA’s chief economist Sarah Hunter said last month: “We’ve been in a situation for some time now where the economy has been a bit overheated”, as Bullock stressed the economy is “more overheated” than the central bank had forecast.
These comments seem at odds with an economy that has just recorded its lowest fiscal year growth figure since 1991-92 (1.5%), excluding the pandemic.
But what Hunter and her boss are trying to stress is that demand relative to supply has been stronger than expected, say three months ago. That imbalance should resolve if inflation (at least the part caused by excess demand) continues to fall towards the RBA’s 2-3% target.
As Bullock said on Thursday: “GDP itself was about where we forecast it to be,” even though some parts of it (e.g. consumption) were weaker than the RBA had predicted.
“Part of the job of monetary policy is to try to slow the growth of the economy because the level of demand for goods and services in the economy is higher than the ability of the economy to supply those goods and services,” she said. “So even if [the economy’s] “Although the pace is slowing, we still have this gap.”
The RBA’s forecasts may not be what it thinks will happen
Every three months, much attention is paid to the updated forecasts from the RBA in its monetary policy statement. (See August’s here .)
One curious feature, however, is that they are partly based on the erratic position of the financial markets. think the RBA cash rate will go. In the case of the August forecasts, the RBA used the cash rate forecasts from 31 July (coincidentally the day the June quarter CPI figures came in).
For example, if the snapshot had been taken on August 5, when the RBA concluded its rate meeting, forecasts for the cash rate would have fallen – as would global financial markets.
Does that matter?
In the RBA’s May forecast, markets were betting that the cash rate would be 3.9% by December 2025 (implying a good chance of two 0.25 basis point rate cuts by then). The August forecast assumes the cash rate would have fallen to 3.6% by the end of 2025 (or a 100% chance of three cuts). The unemployment rate would have peaked at 4.4% – assuming those excited investors were right.
Bullock said the RBA “could do that exercise” of modelling the path it thinks its own cash rate will take. (Whether it would do such a model run, and whether it would produce a very different peak unemployment rate than currently forecast, Bullock did not say.)
Perhaps Bullock’s attempts to extinguish hopes of early rate cuts will make them more likely as borrowers rein in their spending. Jawboning, after all, is the other tool – beyond just the cash rate – in the RBA’s limited toolbox.