Australia’s tumbling neutral cash rate


Via the SMH blog:

…from Credit Suisse’s Damien Boey and Hasan Tevfik:

“It would only take 100bps” – [1 percentage point] – “of rate hikes to bring the debt-servicing ratio back to GFC highs, which we view as unsustainable.”

That’s their take on the Reserve Bank of Australia and the interest rate outlook and part of the reason why they think if the RBA did raise, the peak would be below 3.5 per cent. Right now rates are at 2.5 per cent.

Borrowers can’t afford rate rises like they used to because mortgages are bigger in dollar terms.

Mortgages are bigger

Yep, the stupidity of it all. This is why I argue that one or two rate rises would be enough to completely stall the housing boom and probably send it into reverse. Those who argue that the neutral cash rate is still up around 4.5% or 5% are far behind the curve.

The RBA is in the process of throwing away its ammunition and when the next crisis strikes the chamber will be empty.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.