‘Overkill’: Economist sounds alarm on rate hikes

Following this week’s 50-bp increase, AMP’s Shane Oliver changed his forecast, now predicting the cash rate to peak at 2.85 per cent.

Traders are currently split on the terminal rate, but the general expectation is that it will peak around 3.8 per cent in the September quarter next year.

For Dr Oliver, these expectations look too hawkish. If realised, he believes, the RBA would likely plunge the economy into recession and push home prices down by 30 per cent or higher.

In fact, Dr Oliver believes the central bank has already stepped into “dangerous” territory.

“Rate hikes always impact with a lag and growth is likely to slow sharply ahead,” Mr Oliver said.

“Given the lags, the RBA should now be starting to slow the pace of tightening. Failure to do so risks recession and overkill in taming inflation.”

In delivering Tuesday’s (6 September) rate hike, RBA governor Philip Lowe cited strong economic growth and a “very tight” labour market, noting that while the unemployment rate stood at 3.4 per cent in July, “a further decline” is likely in the months ahead.

But Dr Oliver warned that some of the data, the RBA appears to be blindly adhering to, is backward-looking and does not indicate “where the economy is going”.

“Given long and variable lags in the way monetary tightening impacts the economy, there is a strong case for the RBA to now slow the pace of rate hikes in order to better assess their impact so far,” Dr Oliver said.

Referencing leading indicators, he said the RBA is already getting traction.

“Consumer confidence is at recessionary levels, housing indicators are falling sharply, and home prices are now also falling sharply which will depress consumer spending via a negative wealth effect,” Dr Oliver explained.

“So given the significant monetary policy tightening already seen, the reality that this will only hit the economy with a lag as it takes a few months for rate hikes to be passed on to borrowers and then for borrowers to adjust their spending, the big hit from falling real wages and the increasing weakness in leading indicators notably for consumer confidence and housing, there is a strong case for the RBA to slow the pace of tightening.”

And while Dr Oliver is concerned with the RBA’s rapid and significant rate hikes, he does believe it is acutely aware of these issues.

The governor’s comment that “higher interest rates are yet to be fully felt in mortgage payments”, along with its desire to “keep the economy on an even keel”, suggest to Dr Oliver that the bank may be moving towards some slowing in the pace of hikes in the months ahead.

Meanwhile, data from several broker groups has shown that borrowers are increasingly reviewing their home loans as rates continue to rise.

Recent research from Aussie Home Loans (Aussie), showed that a significant number of Australian mortgage holders are “waiting, watching and hurtling” towards mortgage “anxiety”.

More than 30 per cent admitted that avoiding a default on their home loan is now “a major consideration”.