CBA: Markets are dead wrong on interest rates

Gareth Aird, head of Australian economics at CBA, has hosed predictions that interest rates could climb to 2.5% or above, for the simple reason that Australian households are far too indebted to endure such rate rises without causing a hard landing for the economy:

Money markets have priced a more aggressive tightening cycle than I believe is necessary to cool the economy and inflation across the medium term.

For context, financial markets expect the cash rate to be about 3 per cent by the end of the year, which implies further rate rises of 265 basis points in just seven months. In contrast, Commonwealth Bank economists expect the RBA to deliver a further 100 basis points of rate hikes this year (we expect 25 basis point hikes in June, July, August and November). It is easy to forget the cash rate was just 0.75 per cent on the eve of the pandemic…

The Australian household sector is one of the most indebted in the world. This means rate rises have a more powerful impact on our household sector than they do in almost any other jurisdiction. In addition, the policy transmission mechanism from the cash rate to home borrowers is much more direct in Australia than it is for many other central banks as the bulk of our debt is floating.

It is worth noting the percentage change in interest rates is incredibly large for each absolute increase in the cash rate given the starting point for rate rises was a record low cash rate. So the interest cost on debt will go up quickly in percentage terms. For example, a 200-basis-point cash rate rise from near-zero has a much bigger effect than, say, moving from 4 per cent to 6 per cent…

Home prices recently have begun to decline in Sydney and Melbourne. And there are already signs of consumer anxiety creeping into survey data. Rising consumer prices and higher mortgage rates will do that. Discretionary expenditure can suffer as a result, which in turn adversely affects employment…

Such a situation is unwanted and can be avoided… There is no need to engineer a hard landing in the economy to lower the rate of inflation across the medium term.

As shown this morning, if interest rates were to rise by 200 basis points, then monthly mortgage repayments would surge by 28%, representing a $668 a month increase in repayments across the median priced Australian home:

Mortgage repayment projections

Such an steep rise in repayments would crush household finances, smash consumption, send house prices sharply lower, and risks driving the economy into an unnecessary recession.

For this reason, the CBA’s 1.25% projected peak in the RBA cash rate is far more realistic.

Unconventional Economist


  1. DingwallMEMBER

    Such an steep rise in repayments would crush household finances, smash consumption, send house prices sharply lower, and risks driving the economy into an unnecessary recession.

    Please make it so…… there are just so many vested interests in this real estate driven, ersatz economy that they all need a good flush.

  2. pfh007.comMEMBER

    A lot of people seem to be assuming that if the RBA does not increase interest rates everything will be fine and dandy.

    The logic seems to be that because monetary policy is currently fully deployed and house prices in Sydney and Melbourne are already falling and “budget repair or tighter fiscal policy seems guaranteed after the election is out of the way there is going to be more than enough deflationary forces operating in the economy and the last thing the RBA needs to do is to raise interest rates.

    But that kind of misses the point that monetary policy is all tapped and the economy is likely to contract in the absence of monetary stimulus and there is not much of that around with interest rates at 0.35%.

    So the issue is what will the government do when the economy starts contracting when interest rates remain low, mortgage lending is flat or contracting and inflation is higher than desirable?

    And the answer is either do nothing and watch the economy implode OR do something different to the usual to support economic activity.

    The odds are they will do something and that something is likely to be out of left field such as direct injections to the wallets of main street.

    Once that starts to happen and economic activity is supported you can be sure that interest rates will rise.

    Expect the unexpected.

    Especially in the USA.

    • BabundaMEMBER

      I tend to agree. The pandemic seems to have broken the back of the monetary + austerity paradigm. Governments now know that what works is monetary + fiscal via debt monetisation. I don’t think they’ll be afraid to deploy that model again and again in ever more creative ways. Beyond this tightening cycle, that would imply inflation and rates higher for longer.

    • dennisMEMBER

      ““budget repair or tighter fiscal policy seems guaranteed after the election is out of the way …….”
      That isn’t gunna happen, people are expecting to be “looked” after and woe betide any gov that doesn’t heed that. Have a look at what the public think on CC etc (SMH article I think), general consensus is that Joe Public is pulling his weight but gov and business isn’t.

      Look out whoever thinks they’ll tell the public to tighten their belt and any opposition expecting to get in without pandering is gunna be on the outside for a looong time. Unless the economy crashes

      Edit: “The odds are they will do something and that something is likely to be out of left field such as direct injections to the wallets of main street…..”

      Wouldn’t this be suicide for a gov; even for a [email protected] like me this appears to have no outcome other than rates going up?

      • pfh007.comMEMBER

        Yes – it is hard to see anyone doing any budget repair anytime soon given that fully extended monetary policy has started losing its mojo and fiscal is about all there is until we get to some interesting fundamental reforms.

        Bearing in mind the determination of the banker lobby to protect their patch, fundamental reforms are probably unlikely.

        So that probably leaves more fiscal fun as the most likely option and it will be just a question of how much upward pressure that puts on rates.

        At the moment there doesn’t seem to be much wages pressure and with the unions in a coma and both sides keen to let Big Australia rip after the election there may not be much anytime soon especially if unemployment gets back to 5% .

        So the RBA might get away with just a few increases before our debt drenched economy starts gasping for more public debt to keep it alive.

        Fortunately for the RBA our trade surplus will keep the AUD up otherwise it might plummet if the RBA drags the chain while the Fed cranks up rates.

        What the Fed does with rates is probably going to be the biggest influence on the RBA re rates and the AUD especially if China decides to cut back on Aussie dirt.

    • Jumping jack flash

      Exactly, if you’re saying that reducing debt growth below the critical growth point to maintain the fake demand that debt spending creates, as well as providing enough growth to repay at least some significant portion of the interest on the debt used for nonproductive debt spending, then, you’re exactly right.

      Its a tenuous balance. I think of it like a control system. A step back too far means the whole thing crashes, and quite quickly, and exponentially too

  3. Craig S.MEMBER

    We then have a devalued currency importing a truck load of inflation…….forcing the RBA to raise rates exponetially. Run while you can.

  4. Goldstandard1MEMBER

    Nah, the base rationale is wrong because the symptom is being diagnosed as the disease here.

    So the markets (Libs and RBA included) forced ppl to borrow well beyond their means, then when the cycle resumes CBA/you say they can’t rise because ppl borrowed too much? This is laughable and pain is here or we never get out of this mess, and it gets worse (like it already has/is).

    • One trick ponyMEMBER

      My question to you is – IF CBA/MB (and myself) are correct – and the cash rate doesn’t need to go anywhere near as high as current market pricing to cause carnage (and any aspects of inflation that monetary policy can influence are completely shot) – by what rationale do you think interest rates will even possibly continue rising beyond that point? I think we all mostly agree with you that there were a lot of major mistakes in getting us to this situation, but what can you do but take a pragmatic view on what will happen from here?

      • Jik the RipperMEMBER

        From a lenders point of view, they will want to earn a return that covers firstly the drop in purchasing power (via inflation) and secondly provides a return for the time value of the money they’re lending. I can’t see how market interest rates stay below the rate of inflation (if it endures).

      • You forget the word risk.
        If we have borrowed too much that is cannot normalise, the risk premium demanded should be higher. That’s not reason in itself for the risk premium to be lower in aud.
        Pointy end of the stick now. All countries are having to show their cards after burying all the problems under the debt rug all these years

    • Jumping jack flash

      “the base rationale is wrong because the symptom is being diagnosed as the disease here.”


      They need to step back and take a long hard look at their abomination and see how it really works, not how they want it to work. There are no fundamentals except for debt growth and debt spending, leading to more debt growth and debt spending. If they attack that basic principle then they will be astonished at how quickly it will all unravel.

      Go long soup kitchens i think.

  5. The australian housing market is like a house of cards marinated in petrol!
    When things got too hot they pour on more petrol to keep it cool.

  6. “Such a situation is unwanted and can be avoided…” how can it it avoided Gareth? So the bank he works for and who have played a part in causing this situation should get bailed out again when the time comes, no strings attached. Or is he saying the non home owners should continue to eat a merde sandwich, we let inflation run, pin yields, drop the dollar, get some more if that import inflation that the economy has been built on over all these decades?

    • happy valleyMEMBER

      The horse has bolted Mr Aird. No point in CBA now trying to shore up the dicky loans they may have written in the past 2+ years.

    • No, he is simply pointing out that in order to achieve the RBA’s stated mandate (whatever your views on that) then for multiple reasons they wont need to pull on the interest rate leaver as hard as the market is currently pricing to order to achieve them. If they do, they risk an unnecessarily poor economic income.

      Australia is suffering far less official inflation than other markets (so far), with a large component of that driven by supply side factors. Our households are more indebted with higher exposure to floating rates = our economy has greater sensitivity to monetary policy and it’s likely to be to be more effective in influencing demand, which is only half your CPI problem anyway. Therefore pricing in cash rate rises which are more aggressive than any of those other nations appears to be overkill…?

      That might well prove to be wrong (just as the market was about near zero long term inflation just 2 years ago) but there is certainly nothing conceptually challenging about that argument.

      • On my first point I was venting on the outcome when things turn for the worse again. Not related to his post but an outcome they would benefit from.

        Look he might be indicating that they don’t have to go that far before things could take a turn for the worse and they could revert and continue to ignore the markets but I don’t think they can do it without consequence.

  7. TFF on steroids coming soon. Only way to protect the A$ and the banks in one go. Keep rates down by manipulating the market bigly. Spread the pain into households, push house prices down a bit and then cut rates and let people take out their super while flooding the place with migrants. Just as the US weaponises the dollar against China and burns it all to a crisp

    • They’re kind of backed into a corner here. Any TFF / fiscal or monetary policy will fuel rates. Let us all pay they fail and bring the reset we all want.

      • Jumping jack flash

        A reset can only occur under the most strict global economic conditions and economic landscape. A reset is an admission of total economic failure and there would be dire consequences for that from the rest of the world that was doing ok comparatively and may object to a reset. Who would that be?

        I believe they are certainly working towards a reset right now and it will take a little more time before conditions are ripe, but then again im a bit of a conspiracy theorist.

    • I fear TFF on steroids will come next year also.

      But seriously we have inflation at 5% (measured) vs a cash rate of .35%, we are already at – 4.65% interest rates, this can kicking has to stop.

  8. Leroy Huggins

    Boomers have a whole lot of money to spend..
    But they’ll be taking it out of their super funds..

    Will funds in be able to balance funds out?

  9. The Travelling PhantomMEMBER

    If the CBA is so worried about increasing the interest rate why then they passed the 0.25% on their mortgage customers in no time??

  10. Jumping jack flash

    The CBA guy is right. There’s far too much debt but the question nobody seems to ask is why. And the next question nobody asks is what has been the effect of that.

    And the answer to the first one is they needed debt spending but once they implemented it it was impossible to take away without causing the exact scenario that the debt spending was meant to avoid

    And the answer to the second question is a decade or more of unprecedented prosperity, even though it was all fake debt spending.

    What we’re going to experience soon is the effects of the dotcom bust, 9/11, 2007 and COVID all at the same time because the debt spending was introduced to avoid all those and now for whatever reason they’ve decided that their false economy of the past 20 years was so much more than debt spending when it wasn’t.

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