Chris Joye: “RBA is absolutely crushing the economy”
CommSec conducted an interview with Coolabah Capital Investments CIO Chris Joye to discuss the outlook for interest rates and the implications for asset classes and the economy.
For mine, the money quote is Joye’s explanation of why the Reserve Bank of Australia’s (RBA) aggressive rate hikes is “crushing the economy”:
“So, here in Australia we’re are at 3.1% [cash rate]. We were at 0.1% last year. That’s a 300 basis point increase. It’s the biggest increase more or less ever”…
“When all the banks were lending to home loan customers in 2020 and 2021, and they were offering these super cheap fixed rate deals circa 2%… the regulator APRA said to the banks at that time, you only need to stress a borrower’s capacity to repay by a 2.5% increase in interest rates”.
“And the RBA has now increased rates by 300 points with more to come”…
“The market is saying that the RBA will finish with a cash rate of about 3.7%… Our sense is they may konk out a little before then. So, maybe low to mid-3s…
“Just make no mistake though, the RBA is absolutely crushing the economy. House prices are falling, consumer confidence is today worse than it was in the GFC, retail spending is nosediving, business confidence has collapsed, and there is a risk the economy will go into recession”.
Joye explains how the RBA’s aggressive monetary tightening will smash Australian mortgage holders, sending 15% into “negative cash flow”:
“The RBA recently released some research showing that if we get to 3.5% [cash rate], 15% of all borrowers will actually have negative cash flows”.
“What does that mean? The RBA looked at their incomes and it took off their mortgage repayments and only essential living expenses. And so 15% are basically not have enough money to repay their home loans at a 3.5% cash rate, which is only a few meetings away”.
“So, we think the RBA’s probably overdone it… [But] the good news is that those terminal cash rates are probably in sight”…
“[But] all the macro data is going to be crappy for a year or two”…
Joye also explains why Australian house prices will continue to fall:
“Australian house prices began falling in May. But they’ll almost certainly fall for another six to 12 months”…
“Basically 23% of all Aussie home loans switch by the end of next year from a super cheap fixed rate that was set between 1.75% and 2.25% to a rate that will be 5% to 6%. So there’s going to be the mother of all interest rate shocks on a quarter of all borrowers”…
“Having one quarter of borrowers have their interest rates double is like a second round of rate hikes, and is going to smash the economy and housing”…
Finally, Joye explains why he believes we are entering a global recession because “we’ve never seen such synchronised global interest rate hikes, and it’s likely to have a big impact on demand”.
I have only touched the surface of this interview with one of Australia’s sharpest economic minds.
