The Reserve Bank has “misread” economic conditions, with a drop in the cash rate “highly conceivable” amid out-of-cycle hikes from lenders that could continue “within a few days”, according to economists.
Falling house prices (1.6 per cent year-on-year), a rise in mortgage arrears (1.38 per cent) and a drop in dwelling approvals (5.2 per cent in July) have been reported against a backdrop of out-of-cycle interest rate hikes from lenders, prompting some economists to question the Reserve Bank of Australia’s economic forecasts.
Over the past several months, the RBA has maintained that the next cash rate move would be up, reflecting strong employment conditions, rising inflation and economic growth expectations.
However, speaking to Mortgage Business, economist at Market Economics Stephen Koukoulas claimed that the central bank has “misread” the market, noting that it could be forced to revise its monetary policy outlook if conditions weaken further and banks continue lifting rates out of cycle.
“It’s still highly conceivable that the next move in rates is down, not up, and that would take an about-face from the RBA who have said the exact opposite,” the economist said.
Senior economist at AMP Capital Shane Oliver echoed Mr Koukoulas’ sentiment, stating that the RBA’s outlook has been “too optimistic”.
“The Reserve Bank is probably just a bit too optimistic about things, and it may be right [to say] that the next move in interest rates will be up, but that depends on their economic forecasts being proven to be correct,” Mr Oliver said.
“Whereas at the moment, my take on the indicators are that we’re stuck in the [economic growth] range we’ve been in over the last few years now, which is around 2.5 to 3 per cent , but it’s hard to see us growing sustainably above 3 per cent like the Reserve Bank is looking for.”
He continued: “At the same time, the housing market downturn adds a degree of risk to things, and for that reason, you can’t rule out the next move being a cut.
“I wouldn’t advocate a cut at this stage, because I don’t think things are that bad, but I certainly wouldn’t rule it out at some point down the track.”
Both economists also predict that Commonwealth Bank, ANZ and NAB would also lift rates following Westpac’s decision to alter its pricing due to rising funding costs, with Mr Oliver expecting the move “within a few days”.
“Historically though, when one bank moves, the rest tend to follow fairly quickly, so I’d say it’s within a few days,” Mr Oliver said.
“Perhaps the big banks were hoping that funding pressures would fade away and funding costs would go to normal, but obviously that hasn’t happened.
“Westpac bit the bullet, and I think it’s only a matter of time before the others follow.”
Mr Koukoulas added: “They can’t hold off for too much longer because they’re confronting the same dynamic of higher cost of funds, a weakening market for one of their main businesses, and they’re not going to want to have their margins squeezed in that sort of environment.”
Citibank has also weighed in following Westpac’s decision to increase rates by 14 basis points, with the global investment bank expecting the rest of the big four to “reprice home loans by a similar magnitude”, despite “the attention focused on the banking sector from the royal commission into banking misconduct”.
However, Citibank has observed that other major banks may not choose to reprice their “front books” in light of heightened mortgage market competition.
“Recent interest rate increases from the smaller banks were on the back books,” Citibank noted.
“Front books were untouched, reflecting the need to increase flows given they were previously growing below system-wide rates.
“We could also see strategic rate cuts from some banks.”