Frydenberg flames interest rate hysteria

Federal Treasurer Josh Frydenberg has flamed the hysteria over interest rates, warning voters that markets are predicting 2%-plus of interest rate rises over the next two years:

Treasurer Josh Frydenberg has warned Australians to brace for higher interest rates…

In an exclusive interview with The Sunday Age and The Sun-Herald, the Treasurer put Australians on notice that “the market has been pricing in – it’s a statement of fact – higher interest rates in due course”…

With financial markets in Australia pricing in a full percentage point increase in interest rates by year’s end, and another 1 percentage point in 2023, Mr Frydenberg conceded the cost of a mortgage was likely to rise…

Frydenberg is technically correct. The market is forecasting 2.15% of interest rate rises by June 2023 (yellow line below):

Market cash rate expectations

Financial markets tip the RBA will lift the cash rate by 2.15% by mid-2023.

That is the equivalent of nine interest rate hikes at the fastest pace of anywhere in the world starting from June 2022.

However, just because that’s what the market is predicting, doesn’t make it true. The lever is in the hands of the RBA, not the markets. And the RBA has repeatedly stated that it is in no rush to lift rates and will keep them on hold until annual wage growth rises above 3% (from 2.3% currently).

My prediction is that the first rate rise won’t arrive until late this year. The tightening cycle will also be far shallower – i.e. less than 1% – because Australian households are so indebted and sensitive to small rate rises.

Think about it. If the discount variable mortgage rate was to rise by 2.15% to 5.60%, as predicted by the market, then mortgage repayments on the median priced home would lift by 29% from their current level.  This would see monthly mortgage repayments on the median priced Australian home rise from $2,599 in February 2022 to $3,344 – an increase of $744. For the median Sydney buyer, median monthly repayments would rise by a whopping $1,141 (see yesterday’s post).

Median monthly mortgage repayments chart

Monthly mortgage repayments would rise 29% if the market’s interest rate projections come true.

Such a sharp increase in mortgage repayments would crash the housing market and economy, which is why the RBA won’t raise rates nearly as early, swiftly nor far as the market is predicting.

Unconventional Economist

Comments

    • I had the same feeling, We are kidding ourselves if we think the RBA has it’s hand on the lever as opposed to its hand on something else. The AUS yield curve reflects the US yield curve, and that’s really the only thing that matters. If overseas lending rates go up, the banks can either pay more, which will flow through to mortgage rates, or move the borrowing book to more domestic deposits which will require “special rates” that will also flow through to mortgage rates. Regardless of what the RBA thinks, if US rates go up then our mortgage rates will go up.

      And that’s before we even get to the currency depreciation. The amount of squealing at over $2 per litre for fuel – the Brits are paying over $3 per litre, which is where we will be heading on sustained high oil prices and a depreciated dollar. Even taking off the excise, which simply adds more to federal debt, won’t be able to hold back the price.

      The RBA can tinker around the edges with its jawboning on temporary inflation, but it really won’t matter.

  1. Skill added to the latest 2IC role going at the RBA, must be proficient at pulling levers.. cos they ain’t gonna pull themselves.

  2. C.M.BurnsMEMBER

    the arrogant spud still thinks they have a chance of winning the election and is trying to soften the blow for the great unwashed, heavily indebted puntertariat. If he has a skerrick of self awareness, he would be painting a super-rosy picture of ever lower interest rates and house prices to the moon… under the continued stewardship of the LNP

    • I had the other thought – “This is what you’ll get voting Labor”. ie he knows they are toast and it’s a pre-emptive told ya so.

    • Dream on – it’s his job to get over leveraged people back to the ground. Wage inflation is real but not yet across the board. RBA is hopeless.

    • IMO this is Joshy blame shifting.

      The market says higher rates so don’t blame the LNP.

      Surprised be didn’t blame Dan Andrews.

  3. I find it hard to believe the RBA can control interest rates ad infinitum against all manner of internal and international currents.
    It seems to this mug punter they have levers that work with varying degrees of success but if for example the Fed decided to knock out inflation
    I don’t see the RBA having much success in resisting
    But As I have no expertise in this area can someone explain how the RBA could keep rates down without other consequences even worse tha higher rates

    • there is no consequence worse than house price declines in RBA world. they will lend free or sub market price money to banks . so long as the consumer keeps believing the support will work , it wiil work if consumer stops believing then nothing can save the RBA as Gough might have said.

      • 1. the stability of the currency of Australia;
        2. the maintenance of full employment in Australia; and
        3. the economic prosperity and welfare of the people of Australia.

        Anyone who doesn’t own a house/assets has full rights to state that the RBA has not represented their economic prosperity as citizens of Australia. They failed on full employment also with one of the most capsulized work forces in the world.

    • Capital looks elsewhere as inflation outstrips CB rate:
      – depreciating currency is a big one, with the AUD slowly declining in spite of large trade surplus (recall the last period of commodity strength when AUD was at parity)
      – bonds sell off, leading to rising yields in spite of CB rate

      Why invest your hard capital into Australia (bonds), when the rate of return is outstripped by inflation? Recall that the Banks have been forced to raise rates, even as the RBA rate has remained at 0.1% this whole time. The bond market is the real determiner of capital costs/funding, with the RBA losing credibility the longer they fight the bond market/ignore inflation.

      • On the AUD going down this would probably be seen by the RBA as a good thing, and avoids the dutch disease that could be caused by record trade surplus. The higher AUD is normally seen as the “cost” of the trade surplus.

        The flaw in their thinking is that very little of that trade surplus stays in Australia these days, mostly flowing back via our “privatised mines” to foreign interests.

      • Why invest your hard capital into Australia (bonds), when the rate of return is outstripped by inflation?

        Good question. Is there any person who invests their capital into Australian bonds? Serious question. Does any person earn money and then buy bonds with it?

        • Just about every super fund in Australia, and every single bank uses them as collateral. So maybe not directly, but indirectly everyone is exposed.

      • Mike Herman TroutMEMBER

        Ahhh. so the real reason they will hike despite inflation not being as pronounced here is to save face. Can’t be a central banker and not appear to be in charge. Its going up with or without you Phil…. sounds like a U2 song…

  4. happy valleyMEMBER

    “That is the equivalent of nine interest rate hikes at the fastest pace of anywhere in the world starting from June 2022.”

    And if this did happen, there’s nothing surer than the banks would not even give 0.1% of the cash rate increase to depositors. The whole lot would go to profit, after giving a decent chunk to management as bonuses.

    • Yes – any quant will tell you that the RBA set interest rates too low in 1988, thus forcing them to raise rates higher than they should have been in 1989. They will also tell you that all of their new, fancy and sophisticated mathematical models would prevent the RBA from making the same mistake again. We shall see.

  5. They might not raise, but what is the upward pressure like for bank funding costs and like likely impact outside the RBA rate influence?

  6. TRADINGtheAPOCALYPSE

    Yeh I dunno depends on what CPI prints are I guess.

    https://www.smh.com.au/business/companies/beer-bread-and-baked-beans-shoppers-warned-price-hikes-coming-20220314-p5a4eu.html

    IMHO Mr Lowe will really need to be one of the greatest bubble jugglers of all time to keep house prices from backsliding even if rates stay where they are. Ie. Reverse “wealth effect” gonna kick in once the horses get startled.

    Unless someone comes up with a stimmy package that is similar, if not larger, than the pandemic largesse handed out to everyone and his dog, I don’t see how house prices won’t come off. Could always entice Some Russian oligarchs over to launder money through property I guess….

    • Know IdeaMEMBER

      Is the CPI that relevant to the RBA? It is not that the board members are in any danger of having to give up consuming wagyu and shiraz. Has the board not long demonstrated a notable ability to “look through” and data that does not match its narrative? Why should the strategy vary now?

      • TRADINGtheAPOCALYPSE

        I guess if we start printing 5pc or higher the observed inflation for the average punter will be higher. The proles already sh1tting bricks with fuel up 50% and talking around the water cooler about rising prices in supermarket ect.

        Once that switch happens, and folks are more concerned about everyday inflation than house prices i imagine there will be a lot more political pressure do “do something”. In the US the FED is under a lot of political pressure because inflation. Don’t see why we’d be so insulated from cost-push (supply and materials) inflation and potential “policy error” (ie. Raising rates). With ongoing climate shocks, China covid, de-globalization push, conflict related supply issues, I can see plenty of non-wage based inflation coming (even into a recession).

        Caveat: I have little idea what I’m talking about and may simply be regurgitating junk

  7. The assumption that rates won’t rise is based on the assumption that the elites don’t want to profit by crashing the market.
    Ducks look lined up to me…..

  8. Mike Herman TroutMEMBER

    The RBA repeatedly stated interest rates were not going up until 2024. I’m wary of their repeated statements. These global banking cartels move together. If the rest of the world is going up, so are we….

  9. lol what was it, a couple of months ago he rushed out to hose down rate rise expectations

    • Interest rates will always be higher under a Labor Government. Will be the next line the Liberals trot out. 😀

      • The Traveling Wilbur 🙉🙈🙊

        Heh. I would have picked that too. But we wuz wrong – it was ‘Albo was a fat cnut’. Didn’t see that one coming myself.

      • The Traveling Wilbur 🙉🙈🙊

        Heh. I would have picked that too. But we wuz wrong – it was ‘Albo was a fat cnût’. Didn’t see that one cóming myself.

  10. Since when do wages rise? By what mechanism is that achieved?

    In any case, they will never ever raise interest rates.

    • Jumping jack flash

      It is entirely possible for interest rates to rise, but only after wages rise enough to counter any interest rate rise.

      Everything is backwards and upside down because the banks are in charge and they necessarily view things that way.

      Wages can only rise after revenue and profits rise and never before.

      In a services and retail (of imported goods) economy based on debt spending like ours, and most of the western economies for that matter, revenue and profits rise when the debt growth rate increases.

      Then theres the whole wage theft aspect which keeps wages from rising so instead interest rates need to be systematically cut to achieve the correct rate of debt growth, as we have all experienced.

      This all works great until they run out of interest rates and after that, to simplify, it requires TON of stimulus to kick off price inflation and then wage inflation generated from the increased revenue and profit from the stimulus spending. Stimulus which Scomo and Joshy boy failed miserably at because they dont really understand how the banks’ debt economy works at a fundamental level, nor do they care enough to find out.

    • I think many people, even the average joe still bidding for houses agrees with you. When the RBA says you should prepare for interest rates, they think the RBA is bluffing. I see it in housing purchases, the auction rates, etc.

      To be honest for wages to rise there needs to be a transmission mechanism for that to happen. Over the past 15-20 years governments have systematically worked to break each transmission mechanism that would cause wage pressure to build. Even with high demand – I see inflation in commodities, and goods we buy but not in wages due to migration.

      The middle class will become the lower class, etc etc as labor value depreciates due to increased numbers is my base case.

      • Jumping jack flash

        Resuming wage theft is the death-knell of this debt economy. Scomo, and probably Joshy-boy as well, need to show some real economic leadership and urge and explain to businesses why they need to pay their workers well… as their revenue increases… from… all that… stimulus spending…

        Well, despite the colossal failure of the stimulus, all is not lost. There is still hope. Our glorious leaders just need to stop the flow of imported labour which basically is used as a mechanism to suppress [wage] inflation.

  11. Jumping jack flash

    Yes exactly.
    Interest rates are simply the price of debt.
    Raising interest rates causes two obvious things to happen, firstly the interest payable on the gargantuan 2 trillion dollars of outstanding mortgages rises and redirects consumption and demand to interest payments.
    Secondly, new debt becomes more expensive. It should be no surprise that new debt is used in part to pay some of the interest and counter the flow of demand and consumption to the banks as interest. If debt becomes more expensive (and wages remain stagnant-ish) then less new debt can be created and then even more consumption and demand must be redirected to interest.

    RBA needs to be very careful. Fortunately they seem to be waiting for wage rises, but i wouldn’t hold my breath. Scomo’s stimulus was a bust and will not do much to kick off wage inflation. The best we can hope for in my opinion is that some of the global price inflation wave gets converted into a bit of wage inflation, but probably will only affect a few sectors at most.

  12. Have a look at the fear and anguish elicited by fuel prices……. a generation and a half is about to learn a part of economics they have zero idea or understanding of. Still getting the stupid look when I tell the kids to consider saving a few dollars where they can, just in case.
    Can’t really see capt Lowe defying global macro to save our young souls from the inevitable

    • The young will be the first Lowe sacrifices at the alter of our faux capitalist (QE/MMT) system

  13. Josh Frydenberg has warned Australians to brace for higher interest rates

    I know how to brace for a emergency landing. I know how to brace a carport for strong winds. Can anyone explain how I can brace for higher interest rates?

    • If you’re highly leveraged the preferred brace position is the same as for a water landing.
      You simply put your head between your knees and kiss your a55 goodbye.

      • Josh “Sully” Frydenberg barks commands to First Officer Morrison:
        “My Plane”
        “Set Flaps to 18.5%”
        “Set LVR to hard landing position”
        Gets on the intercom to the passengers:
        “This is your captain speaking, brace for impact”

    • Withdraw spending from labour intensive vendors in areas such as hospitality and retail.

      That’ll work wonders….

  14. Generally speaking I’ve been very cynical wrt Australia’s ability to reindustrialize (even to regroup at 2000 era levels would be a major undertaking) however discussions over the last couple of weeks have me wondering if I’m still living in the same Australia. Something has changed, that which was completely unimportant has suddenly become critical.
    The only major changes that I’ve observed are Russia invading Ukraine while China, India and a lot of other interested parties sit around and scratch themselves. Nothing that’s happening really surprises me, yet somewhere there’s a bunch of Aussie defense guys who must be screaming bloody murder because the immovable is beginning to move.
    What’s this got to do with interest rates? well it doesn’t make any sense for Australia to be undertaking any of the projects that are suddenly appearing unless they remake the industrial framework that these pieces fit into.
    The price for just the piece parts will be astronomical, the price to recreate our lost industrial framework immeasurable, but that appears to be a road that we just turned onto.
    I spent much of the last week trying to cost a small project and I was astounded at component prices. The other thing that’s really clear is the shallow depth of the Aussie talent pool. If even half the projects that I’m looking at get the nod then every Aussie that can spin a spanner will be asking for $150K plus. plus, plus.
    This is Technical skills wage inflation happening in real time.
    I’m moving as quickly as I can to put together a team but it’s clear that others are ahead of me. I haven’t seen a stem labour market as hot as this since the before the 2000 tech wreck. And these are the market conditions into which Australia will attempt to reindustrialize.
    If you’re looking for inflation drivers than this is wage inflation drivers in spades.
    Component price inflation is there for all to see and will only accelerate with Aussie dollar devaluation.

      • At the moment the skills I will need immediately include
        Analog / RF / opto electronics design,
        Sensor / Actuator design,
        Rapid system prototyping FPGA,
        Advanced Control systems (nonlinear model predictive control)
        Real time Optical flow software/hardware/systems design
        that’s a decent shopping list. To begin with I will need to staff all the lead engineering positions and write al the functional system speciation’s.

        • drsmithyMEMBER

          MB denizens will probably not like it when you tell them those skills at the required level will be difficult to source locally. 😉

          • The problem is not so much that these skills don’t exist locally rather it’s clear that once more than one project heats up the available (even somewhat skilled) pool will be sucked dry.
            Unfortunately these are not areas where you can “fake it till you make it” If any of the teams is not up to the task then I’ll need to step in and do the job, so I can’t afford to have more then one project pathway problem.
            At the moment It looks like the teams themselves can maybe be locally staffed but the team leadership positions will be very difficult to locally source. With the schedule I’m committing to I can’t afford either delays or failure.

          • This is exactly how things though should work. The fact that skilled “good” workers are only paid 150k or less despite the long study, etc is exactly why, especially given recent inflation, there isn’t a big pool of workers there. I know local patio installers paid that for example which given the cost/risk/reward ratio (less study, work, same pay) is the rational choice here in Australia.

            We need the following to bring talent to STEM:

            – Demand for skill goes up
            – Labor force only there for previous demand
            – Wages need to rise
            – After a few years this attracts training and people to enter the job due to pay (typical of Engineering)
            – Things even out.

            We’ve been suppressing wages for so long that many in the field were wondering why they ever entered (i.e. typical of many engineers I’ve talked to, some of them quite good).

            The talent pool for these skills is precisely because we’ve hollowed out the demand for these people, and imported these skills suppressing wages for so long that it is easier to go to another profession (i.e not STEM) in Australia. Why as a smart worker would you join this industry if you think your wage could be better elsewhere?

            Wages need to rise to make it an attractive industry for people to train again. Pay silicon valley wages for example, and watch everyone flock to the industry over time, and the talent pool increase (i.e. the just learn to code mantra there). The most innovative countries in STEM fields ironically pay the highest wages.

        • Genuine question – does any of that need to be done in Australia (maybe info-sensitive industry like Defence?). Because if it doesn’t, surely you are up against it?

          • I’m trying to keep it in Australia but in the end I’m a realist. (and someone who has done way too many air mile)
            So I don’t want to manage a divided project and I don’t want to move.
            I don’t know how easily I can partition the project to allow it to be done externally, it adds a lot of work to get project component designs done to a specification without ever telling those implementing the specification what exactly the project goal is.

          • ^ I suspect your answer to Smithy covers it, but I was thinking to myself that wherever you go in the world Tier 1 operators in this field are going to be expensive and probably occupied. Leaving you with Tier 2 (at best) imports/outsourcing, lots of coffee, tears and multiple colours in your ‘track changes’. Good luck!

        • They sound like the type of skills which been ‘scarce’ for over 10 years.

          Nothing has been done in a decade to address this scarcity?

          • that’s why I’m trying to move as quickly as possible
            We have a shallow pool of skilled people and a practically empty pipeline, if Australia’s revitalization kicks off more than a couple of projects then a lot of project managers are going to hear that empty gurgling sound as they suck the pond dry. experience tells me to never staff a project with the muck you find at the bottom of the technical employment pond.

          • that’s why I’m trying to move as quickly as possible

            A decade is ‘quick’ to address a structural problem?

            We have a shallow pool of skilled people and a practically empty pipeline,

            Empty pipeline means no structure for training. I mean this is so bad in terms of the number one rule of leadership… you even confirmed it yourself.

            then I’ll need to step in and do the job, so I can’t afford to have more then one project pathway problem.

            So if something happens to you where you can’t work, there is no one capable of resolving a ‘project pathway problem’? That seems to imply a very, very poor succession plan, or the #1 rule of leadership.

            if Australia’s revitalization kicks off more than a couple of projects then a lot of project managers are going to hear that empty gurgling sound as they suck the pond dry. experience tells me to never staff a project with the muck you find at the bottom of the technical employment pond.

            They had 10+ years to turn the pond into a lake.

          • We are where we are, there’s nothing that I can do about that.
            I’ve decided to step back into the game largely because I’m sick of seeing others snatch defeat from the jaws of victory.
            I’m sick of it, we’re not a stupid people, we need to start doing projects and simply succeeding, sometimes it can be that easy. Hubris maybe but …

        • I know someone with lots of experience in FPGAs with double degree in Electronics/Computer Science who might be interested.

  15. Goldstandard1MEMBER

    Just so I’m clear Leith. The gov want high house prices with low interest rates, more debt, low inflation, mass immigration whilst increasing wages? But you understand that can’t happen right. Once they bottomed interest rates at EMERGENCY levels, it is then left to something to break and that is what you are seeing now. End of story,.