Following yesterday’s poor job vacancies data, the risk that Australia is sliding towards recession has increased. So, as a thought experiment, I have revisited our last period of falling growth, the GFC, and see what kind of powder the RBA has kept dry. The following chart is the result, tracking the change in the cash rate, the average mortgage rate and the spread between them:
In the depths of the GFC when the cash rate fell to its nadir of 3%, average mortgage rates were 5.1% and the spread 2.1%, obviously.
At the end of April, that spread had widened to 2.45% and we can add another 10% since to make it 2.55%. So, if the RBA wanted to get mortgage rates back to the lows of April 2009 even today it would have to cut the cash rate to 2.5%. Given the GFC experience also shows that banks are likely to need to expand the spread to the cash rate much further in stressed conditions, perhaps by another 1%, you can see that the RBA is already going to have to go to somewhere above 1% to get mortgage rates to 5%.
I think unlikely that we will ever see sub 5% mortgage rates.
