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.

Houses and Holes


  1. Anyone who thinks the S wont HTF is… well, a true blue, dinky di, Ozzi.

    Ammunition certainly depleted.

    But entirely spent? Maybe the RBA thinks it can go lower on the cash rate…

  2. General Disarray

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

    The implication of that is banks have not been lending prudently.

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

      The same goes for the US.

      The Fed cannot afford to taper because once they do then there will be a glut of Treasury notes. Once there is a glut of Treasury notes then rates will go up. Once rates go up then the economy cannot pay the rising interest bills.

      Why does anybody still believe that the Fed will taper?

      *Shake head*

  3. The RBA has painted itself into a corner. Even at the current rate, the debt bubble continues to get bigger which means the spread noose gets tighter. Cut rates, more debt, even tighter spread. Too late for MP, this horse has well and truely bolted.

    • “Even at the current rate, the debt bubble continues to get bigger”

      Yep…unlatched stable doors and absent equines!

  4. I agree that the neutral rate is significantly lower than it was, I think the RBA’s ammunition is limited more by what other CB’s are doing though.

    If we are in full print mode from BoE, Fed, ECB, BoJ and maybe even PBOC then the ammunition box is probably fuller than you think.

    Viewing the situation through the lens of the pre QE world is also behind the curve IMO, just not as far.

    What if we were at an OCR of 1.5% with the currency at 105 ? Then what ?

  5. The Patrician

    The neutral cash rate has to be lower because we are carrying too much debt. FFS

    It won’t rain today because I don’t have an umbrella.

    Up is down, black is white and the RBA must cut.

    God help us all if this is what passes for sound economic reasoning.

  6. moderate mouse

    More evidence (not that it was needed), that they are managing a bubble, not an economy.

      • moderate mouse

        Can’t claim credit for that one…..that was Lindsay David to BS y’day.

        But it’s a beauty and I’m running with it!

  7. Is there anything stopping banks tightening the reigns a little? You know, not lending to every Tom, Dick and Harry (or should that be Xiang, Wei Zhang and Yang?) Can the Govt influence this or are they totally impotent?

      • Yes – that gets a prize!

        A Meatpro ham and 2 litres of Patra Orange Juice.

        (for the old Controversy Corner fans)

      • Down in Victoria on world of sport it used to be the patra fruit juice, the bertocchi ham, the sidchrome spanner set, four n twenty pies, the artex wallet, and a sires suit – and the really big winners could score a holden.

        Of course we have sold off most of those

      • migtronixMEMBER

        With a helping of military industrial complex 😀

        EDIT make that military securo complex, who the f#ck does industrial anymore?

      • MIC? Where do they get their financing from?

        The banks. Just like everyone else.

        Mankind, know thy true enemy.

        edit: LOL timely edit, was about to chip you on the “industrial” part, espec. in Oz context 😉

  8. Welcome to ZIRP. I suspect come early 2015 we will have 0% Cash Rate the U.S would have suffered the effects of getting clean and the world economy will stall QE will start again but by that time we will be cutting like mad.

    One wonders is Joe Cocky will still be wanting to cut when we hit the liquidity trap

    • outsidetrader

      Of course we’ll have to cut – interest rates after all are always lower under a Coalition Government 🙂

  9. The mess we are in now is a logical destination of the structurally lower rates over the last several decades.

    By taxing deposit interests to an extent that the after tax return is below inflation, the governments in the West had succeeded in discouraging saving and encouraging consumption.

    The answer (as to how to get out of this mess) lies back in time.