Markets, economists still dead wrong on Australian interest rates

The AFR’s latest survey of 31 economists reveals a median forecast for the official cash rate (OCR) of 2.35% by December and a peak of 2.85%. Thus, Australia’s OCR would rise another 2.0% from its current level under the economists’ median projection.

The futures market remains even more bullish, tipping an OCR of 3.0% by December and 3.6% by June 2023:

Futures market interest rate projection

Futures market still bullish on rates.

If either interest rate forecast came to fruition, it would see Australian mortgage rates soar.

Assuming increases in the OCR are passed onto mortgage holders, Australia’s average discount variable mortgage rate would climb to 6.2% under the economists’ forecast (dashed red line below) and to 6.9% under the market’s forecast (solid red line below):

Projected Australian mortgage rates

Australian mortgage rates are tipped to soar.

The market’s OCR forecast would mean that the discount variable mortgage rate would climb to precisely double its level (3.45%) before the Reserve Bank’s tightening cycle, whereas the economists’ forecast would be 0.7% lower. Either way, Australian households would face a gigantic rise in monthly mortgage repayments, which would see many fall into severe financial stress, would hammer house prices, and would see household consumption – the main driver of the Australian economy – fall sharply, risking a painful recession.

For these reasons, I believe both the market’s and economists’ OCR projections are unrealistically bullish and will yet again be proven wrong. The Reserve Bank will be stopped out before the OCR hits such extreme levels.

Otherwise the Australian economy will face a nasty recession that will cause the Reserve Bank to slam into reverse and sharply cut rates – much like it did during the GFC when it wrongly tightened monetary policy into the global recession.

Unconventional Economist
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Comments

  1. I’ll give you points for backing yourself.
    How confident are you that the entire Futures Market and 31 economists are dead wrong and you are right?

    • The Travelling PhantomMEMBER

      To be honest, if the economists are of the kouk bar…LVO will be proven right

  2. This is not like 2008 though right. Like all the other CBs were loosening and RBA was tightening back then. So makes sense they had to reverse course. Here they are tightening when every other CB is tightening.
    Seems like a small boat taken along the tide. Sure it will capsize eventually, but fighting the tide was just going to decimate it sooner.

  3. LvO could well be right. One of the RBA mandates is the “welfare and prosperity of all Australians”. If the RBA continues to raise while all around them is being destroyed, they will have failed under their mandate. Inflation is not there only goal and a few on here forget this.

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

    • But if rest of world raise and we don’t then presume dol lah goes down and we import inflation

      • The dollar and associated inflation is only 1 out of 3 of the mandates. I cannot see a world where RBA as a sovereign currency issuer will destroy the people and employment for the sake of currency issues which can be managed short to medium term.

        • How will you ‘manage’ the currency issues but through rates or capital controls?

    • I reckon the RBA is working for other interests. There is a conspiracy. Some will benefit from smashing the housing market. Why would they crash the Australian economy when most economists think its a bad idea? Doesnt look like they are concerned with the welfare of Australians.

    • No, all three have inflation as the background mandate.
      Currency has an inflation backstop, don’t raise in line with other CBs and the currency does take a hit.
      Maintenance of full employment – let’s say they’ve overshot this, part in reason for the high inflation.
      Economic prosperity of the people of australia is a wide basket – at the very least, inflation is the one that affects all, asset and non-asset holders. And they’re not propering when food and energy prices are continually increasing.

      So, house prices are only a small percentage of the last point there as it only affects home owners, inflation is baked into all three.

    • Too big a gap between the market and the RBA cash rate will see capital flight which is very bad for the economy and banks, particularly when they need to borrow offshore. Add in moderating commodity prices and it could get uuugggly.
      Without capital controls the RBA is NOT the master of its own rates/currency destiny.

  4. The Grey RiderMEMBER

    The RBA is snookered…any decision they make will have dire consequences.

  5. You’ve got to remember, they are forecasting what they think will happen, not what they think should happen. The RBA have the bit between their teeth, they will argue tomorrow that the economy is strong, expanding above trend, the labour market is tight and inflationary shadows are everywhere. And they will deliver 50bp with another likely next month. Sure they will note slowing housing in Sydney and Melbourne, and slowing global growth, but it won’t influence their view one bit.

    Will the housing market melt down, im guessing yes.

    The collapse in long term inflation swaps tells you all you need to know.

  6. I reckon the RBA is working for other interests. There is a conspiracy. Some will benefit from smashing the housing market. Why would they crash the Australian economy when most economists think its a bad idea? Doesnt look like they are concerned with the welfare of Australians.

    • I mulled over this during the entire LNP destructive term of ‘Governance’ (Read: Line our mates pockets)
      I’m 100% convinced ScoMo kept forcing the RBA’s hand; Philip Lowe is an LNP patsy IMO.

      Any prudent economist would have slowly raised rates in Feb this year when RusPutin lost his mind.

    • Jumping jack flash

      My opinion is they originally started off with a plan to induce hyperinflation to inflate the debt away. This plan was chosen because they’d hit the lower interest rate bound.
      Hitting the lower interest rate bound didn’t change the fact that the global economy was basically a giant debt ponzi, and it still is. All it meant was they couldn’t lower interest rates to manipulate everyone’s debt eligibility and keep the ponzi running.

      Fortunately debt eligibility is a function with 2 main parameters, interest rates AND income.
      But how do they inflate incomes? They’d been trying for years with no success. The RBA even said it was a mystery and a travesty that wages weren’t inflating with all that debt about.

      But under the cover of COVID they went for it. They plonked trillions of stimulus into the economy.
      They assured everyone that the resulting price inflation from this stimulus was “transitory”, and indeed it was, or that was the intention.
      They even went so far as to raise minimum wages to kick off wage inflation, (or at least start putting that into action)

      Then, they got a tap on the shoulder. A note was pressed into their hands. The note said “pull it”. So dutifully they started raising interest rates.

      The effect of raising interest rates in a global debt ponzi economy is well understood. One only needs to look back to 2007 to see what the effects of doing that are.

      • “Then, they got a tap on the shoulder. A note was pressed into their hands. The note said “pull it”. So dutifully they started raising interest rates.”
        I dont get it though, I thought “they” were in control.. I thought we were told, there was nothing that could stop them from inflating the debt away.. who and why did they get tapped? You mean those bond people who wouldn’t take it lying down? HOw come not a single person pointed out that RBA might be tapped on the shoulder to do so?

        • Jumping jack flash

          No idea. But it certainly seemed like they were having a decent go at hyperinflation. Perhaps the governments were acting unilaterally?

          Who was ultimately responsible for the trillions of stimulus in the name of COVID?

          One of the problems is if they want to pursue the hyperinflation path, it involves ignoring a lot of the archaic checks and balances – more than the ones they currently ignore, of course.

          Perhaps they just couldn’t bring themselves to do it?

          https://www.youtube.com/watch?v=DhINrIySIqY

          • Jumping jack flash

            Nah, our particular contribution to the global stimulus effort was as half-baked as those who attempted it.
            Our pathetic attempt at stimulus ended up with private companies hoarding the stimulus or paying it back to the government!! That’s pretty much the very definition of a failed stimulus attempt.

            No, it was the trillions contributed by most of the other developed nations that have kicked off this global inflation wave.
            Now the perpetrators have changed their strategy, for whatever reason.

      • Camden HavenMEMBER

        It’s even more interesting to look back at the rate hikes that ended Japanese assent to world primacy. This strategy is proven and it’s being wheeled out for Chyna

  7. Leith, would you make a guess on how high the RBO will push interest rates? Economists are sheep they are just repeating the line from the RBO, assuming that’s going to happen. Interest rates were supposed to be flat till 2024. Why should we believe them this time? Its great that you think outside the square. Really enjoyed the article.

  8. Finance MessiahMEMBER

    The RBA is a rowboat in the ocean without a paddle. In its crusade to fight inflation, it’s going to plunge Australia into a recession that could have been avoided. Don’t be surprised if once again, we reach December 2022 and Lowe and the gangs inflation figures were way off the mark.

    What I can’t wrap my head around is why the RBA left things to the last minute. The last couple of rate increases were quite sudden and unexpected for a lot of people. I am convinced that nobody over at RBA headquarters knows more than the people in the comments section here do.

    Why does the RBA keep lying about the real cause of inflation? We’ve heard Lowe and other economists parroting the household consumption rhetoric and that rates need to come up to curtail household spending. The cost of fuel, energy and groceries seem to be the biggest expenditures. So, what does the RBA do? Oh, let’s make people poor so they can’t afford to buy as much food. The major contributing factor to Australia’s inflation is supply chain problems that have been a mainstay since the pandemic (and made worse by the war in Ukraine).

    Despite what we are being told, some things are falling. Shipping container costs are falling, house prices are falling and a few other things. The interest rate increases around the world are already starting to do their job.

    The solution is obvious: fix supply issues.

      • Finance MessiahMEMBER

        Easier said than that, for sure. It highlights how powerless central banks like the RBA are in the current climate. Supply constraints around goods and services drive inflation, not greedy consumers buying flat-screen TVs and investment properties. All central banks can do is punish consumers for wanting to buy fresh fruit and vegetables, fill their fuel tanks and turn the heating on in winter or air conditioning in summer.

        • kannigetMEMBER

          The Sheer stupidity around property purchase prices would suggest that people were not struggling to by fruit and vegies with their hard earned dollars. Raising rates puts a cap on the potential buying power of those who where buying. People struggling to buy fruit and vegies were not or at least should not have been buying property.

          • Finance MessiahMEMBER

            In all fairness, much of the property boom pre-dates the Ukraine War, the floods and other seriously supply constrain issues. Regardless of whether you have a mortgage or you rent, you’re going to be impacted by interest rates.

          • Lots of people were NOT buying property. They might be the ones struggling to buy fruit and veg. Some of the first home buyers might have to give up food to pay the mortgage also.

  9. MathiasMEMBER

    Nationally… it wont be good… but it’ll be a very big stick to all the selfish moronic Landlords to say, ” Pull your bloody heads in “. It’ll probably be ignored as we live in the most selfish and ignorant country on the planet. I love bushcraft.

    Aussie 10 year Bonds Doodle Schmoodle
    https://gyazo.com/abe9bfcdf0962d368222da8759555105

    -glances at AUD-
    https://gyazo.com/ed5337b318dd0d90995cddbd451c43aa

    -glances at Oil-
    https://gyazo.com/bfdbcfca8dfd7229e84f49952413e914

    So bcnichs ideas ( great btw ), based on the idea of collapsing US Bonds and a collapsing DXY… sending AUDUSD higher ( correlation effect ).

    MB saying its not rises but falls coming. So clearly, MB’s expecting rising DXY. ( Oil and China? )

    If in doubt, trust in the Economist.

    Biggest Australian Pension Posts First Annual Drop Since 2009
    https://www.bloomberg.com/news/articles/2022-07-04/biggest-australian-pension-posts-first-annual-drop-since-2009?srnd=premium-asia#xj4y7vzkg

    I fear Australia is about to Utterly destroy its Labor Force and send Social Problems into the stratosphere. Stress levels through the roof and Meth addictions turning Suicidal. When its all over, I doubt you’ll be able to hire a simple house cleaner.

    Sydneys being wrecked before our eyes.

    Im guessing the next future Election will be fought in Queensland as everyone will have abandoned Sydney by then.

    Left wing politics… Right wing politics… I think we are seeing whats really in charge… ” The will to survive “… People are literally packing up there sh-t and leaving everything behind for the want of a better ‘ Quality of Life ‘.

    Chaos and Order

    I wont lie. This is extremely entertaining.

    • Jumping jack flash

      “I fear Australia is about to Utterly destroy its Labor Force and send Social Problems into the stratosphere.”

      The economy is pure debt.
      Look around. Everything is services or selling imported goods for markup. The debt is being used to generate demand for those goods and services, which pays the wages and keeps everyone employed.

      Turn off the debt and guess what happens. In fact they don’t even need to turn it off. They just need to reduce the debt growth below the critical point and everything will naturally deflate from the interest taking away from demand.

      But if they then raise the interest rates in that environment…

        • Jumping jack flash

          Of course.
          But it is no mystery that they created a new economic paradigm in the late 90s, starting with that equitymate stuff, which was just a fancy name for “more debt”.

  10. Jumping jack flash

    Well, this is a pickle.
    All the governments plonk trillions of stimulus dollars into the economy and now all the banks are scrambling around trying to accommodate them. Whatever can they do?

    Surely the hastily abandoned original plan was to kick off a bit of hyperinflation and inflate all the debt away? All signs point to this being the case, but now since they’ve inexplicably stopped following that plan there’s now an extra couple of trillion nonproductive [debt] dollars in the economy and nowhere for it to go!

    The solution is remarkably simple. Do what they did back in 2008 and open teh gates!
    Share the trillions of stimulus dollars around between more people!

    Does anyone actually think that they achieved anything by raising interest rates in 2007 other than crashing houses a bit, and killing off a couple of banks? Food and energy, which were driving the 2007 inflation the same as they are now, pretty much maintained all their prices throughout, and afterwards.

    • Oh yeah Ive heard of this “inflating the debt away” thing. How is that supposed to work again?
      They said RBA would just let you inflate away the debt… they didnt mention the bond market that would let RBA hand out a free lunch. So where’s this debt that looks smaller now than before?

      • Jumping jack flash

        Yes, I think they started heading down that path and then they stopped. Possibly for the reasons you say. Possibly it was something else.
        Maybe they all got cold feet at the last minute?

        • Mike Herman TroutMEMBER

          I don’t think there is a grand plan. I think it is a combination of being backward looking, incompetent, and using models that are not functional in the real world.

      • Camden HavenMEMBER

        Zimbabwe is successfully inflating their debts away 🥳 100% inflation you and Interest rate at 190%. Problem solved….not