News Corp Australia reported on April 23 that while desperate homeowners, including more than 1 million people facing mortgage pressure, are waiting for the cost of living to ease, there are fears of another rate hike as employment remains strong and inflation remains difficult to control.
Over the course of 13 months, mortgage rates have been pushed up from an all-time low of 0.1% to 4.35%. This is the largest increase in interest rates in Australia in 40 years in the shortest period of time, resulting in many people taking out thousands of dollars more on their mortgages.
The last time the RBA was so aggressive led to Australia falling into its worst recession since the 1930s. While the RBA has said the road to a soft landing is "narrow" and hopes to achieve this, some fear that Australia is teetering on the brink of another rate hike.
(Image source: News Corp Australia)
The latest data from Roy Morgan shows that 1.53 million mortgage holders were at risk of mortgage stress in March 2024, down 98,000 from February, but little changed from December 2023.
"While inflationary pressures have eased significantly, inflation remains above the RBA's preferred target range of 2%-3%, with inflation indicators such as gasoline prices remaining elevated. ”
Roy Morgan CEO Michele Levine said. "For the first time in history, the average retail price of petrol has been above $1.8 per litre for 41 consecutive weeks (equivalent to 10 months). ”
"For these reasons, we are modelling a further 0.25% rate hike in May and June 2024. If the central bank raises interest rates by 0.25% to 4.85% in May and June, Roy Morgan predicts that the number of mortgage holders facing mortgage stress will increase to 1.57 million (31.1%). ”
(Image source: News Corp Australia)
She said the variable that has the greatest impact on whether a borrower is at risk is related to household income, which is directly related to employment.
"The job market has been exceptionally strong over the past year, which has supported household income growth and helped to mitigate the increase in mortgage stress since mid-2023. "However, rising interest rates since May 2022 have led to a significant increase in the number of mortgage holders considered to be at risk. ”
"If inflation accelerates again in the coming months, leading to another rate hike in 2024, mortgage stress levels will start to rise again later this year. ”
Michele Levine (Credit: News Corp Australia)
*Equal likelihood of rate hike or rate cut*
Meanwhile, new jobs data released this month has slimmed hopes of the RBA rate cut this year.
Data from the Australian Bureau of Statistics showed that the unemployment rate edged up to 3.8% in March from 3.7% in February.
Last month, the number of full-time jobs increased by 27,900, but this increase was offset by a decrease of 34,500 part-time jobs.
Warren Hogan, chief economic adviser at Judo Bank, worries that economic momentum is picking up as retail spending rises and employment remains strong.
"The March jobs data confirmed the higher-than-expected levels in February. Employment and working hours will remain stable in 2024. Now there are equal possibilities for the direction of the next rate adjustment. ”
Judo Bank's data also showed an improvement in the manufacturing sector, with services output rising to its highest level in two years.
"It looks like the economy is drifting off the central bank's 'narrow path', which is good news for businesses, employment and economic growth, but the question is whether inflation can still return to below 3% on a sustainable basis. ”
Warren Hogan (Credit: News Corp Australia)
Ben Picton, senior strategist at Rabobank, agrees that further rate hikes cannot be ruled out and questions about calls for rate cuts, especially given that "a fairly strong result does nothing to help the 'cut now' narrative".
Picton doesn't see the time to cut interest rates, noting that job advertisements are still 59% above pre-pandemic levels, retail sales are above 2009-2019 trends, and credit growth is accelerating.
"We will also cut taxes, and the Prime Minister and Finance Minister have said they will spend more in the budget. The Australian Securities Exchange (ASX) index hit an all-time high. ”
(Image source: News Corp Australia)
*Closing the door on rate cuts*
In the wake of Iran's attack on Israel with more than 300 munitions, Betashares chief economist David Bassanese warned that global inflation and interest rates in Australia could be affected.
"The good news in the near term is that tensions between Israel and Iran seem to be easing, and if that's the case, there's a good chance we've seen oil prices peak, as well as the upward pressure on inflation from fuel prices. "However, the interest rate outlook remains largely dependent on the strength of economic activity, as well as the persistence of services inflation. ”
He warned that while domestic consumer spending remains weak, job growth and the labour market remain tight.
"The central bank will also be aware that the recent inflationary pressures in the US have unexpectedly shown an upward trend. Taken together, these factors have reduced the pressure on local interest rates to cut interest rates soon. ”
"Tomorrow's CPI report will be very important. If it is confirmed that inflation continues to fall, the door to rate cuts later this year will remain open, while if the numbers are high, the door may be closed. Overall, I still expect the central bank to cut rates at least once this year, but most likely not before November or December. ”
David Bassanese (Credit: News Corporation Australia)
Josh Sale, group manager of research, ratings and product data at Canstar, agrees that the March inflation data will be very important for when to cut interest rates for the first time.
"Last week's stronger-than-expected US inflation data could alert the RBA not to start lowering interest rates until the inflation dragon is killed. Sale said.
*More waiting*
Meanwhile, Deloitte Access Economics partner Stephen Smith believes that a rate cut is still possible as inflation is slowly but steadily receding, but a thorny issue for the central bank is that official data shows that the labor market has not yet deteriorated.
"The third phase of tax cuts in the second half of 2024 and the gradual improvement in real wages will greatly reduce the burden on households. ”
At the same time, the fading of business investment, the stagnation of the housing construction sector and the uncertainty of the global environment have also cast a shadow over the outlook for economic growth. ”
"There are more and more reasons to cut rates, but there is still a lot of debate about the timing and magnitude of the cuts. ”
"Our forecasts now include the first rate cut in November this year, as we recognise that cautious central banks are likely to want to see September quarterly inflation data due at the end of October before pulling the trigger on a rate cut. ”
(Image source: News Corp Australia)
*Global Situation*
But it could also depend on the US, as the Fed is the world's largest central bank and often dominates the global interest rate cut agenda. The U.S. interest rate is currently at 5.37%, the highest in 23 years, and some economists have now abandoned their predictions of cutting rates by June. On the contrary, experts warn that there will be no rate cut before Christmas, after the acceleration of inflation in the United States from 3.2% to 3.5% in March.
Chris Hare, senior economist at HSBC, and Ryan Wang, a US economist, said the market is showing an increased risk of delayed rate cuts, especially in the US, but in Europe, where demand is weak and cost pressures have eased, easing is still largely on schedule. However, economists expect the US Federal Reserve, the European Central Bank and the Bank of England to cut rates by 0.25% in June.
(Image source: News Corp Australia)
"There are two main features of these rate cut projections. First, by historical standards, rate cuts have been gradual. This is because we are seeing further stickiness in inflation, mainly due to strong growth in the US, as well as high labor costs in Europe (due to low productivity). They said.
"Second, while our forecasts are similar for all three central banks, our beliefs about rate cuts vary – the Fed is the least likely to cut rates, the ECB is most likely to cut rates, and the Bank of England is somewhere in between. ”
"For the Fed, the stagnation of deflationary risks is driving rate cuts after June, and if above-trend growth continues, there are upside risks in the medium term. ”