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Good news for interest rate worriers

Peter Switzer
20 December 2023

I know this has to be the silly season when news outlets can waste their time headlining human interest and tragic life stories, when one of the great dramas of the lives of many Australians could be soon over. What could that be?

Try the one thing that’s hurting Anthony Albanese’s popularity and could be threatening him to be a oncer PM — the cost of living and rising interest rates — which both might be on the way down in 2024!

That’s the story that top economists are pedalling following the reading of the Reserve Bank minutes from the last meeting on December 5. Don’t get me wrong, if economic data surprises to the high side when it comes to inflation readings on January 10 and then January 31, they could raise rates. But right now, data drops plus the notes from the last meeting have the money markets agreeing with economists that the next move for rates will be down!

That must be music to the ears of those Aussies struggling with 13 rate rises since May 2022. Right now, the betting is that the first cut will be around September. However, if the economic growth data shows that our economy is slowing faster than expected, the RBA could move earlier.

And the AFR’s Michael Read says: “Capital Economics analyst Abhijit Surya predicts a sharper-than-expected fall in inflation and slowing growth will force the RBA to start cutting rates as early as May 2024”.

This is what Abhijit Surya thought was important: “It seems to be the case that the RBA is increasingly concerned about the health of the domestic economy. It noted that household consumption was subdued in aggregate terms and falling outright in per capita terms. It also highlighted the fact that timely indicators pointed to a further weakening of consumer spending in the December quarter”.

Also, the September quarter economic growth coming in at 0.2% was below market forecasts. It was the softest pace of expansion since the third quarter of 2022 and has made the RBA concerned that they might have done enough with rates. Remember, there are still quite a lot of borrowers who haven’t moved off low fixed rate home loans but will in coming months.

This should be worrying the RBA, with mortgage stress spiking big time. This is what The Guardian reported on Cup Day, a day when the RBA raised the cash rate by 0.25% taking it to 4.35%: “Almost half of Australia’s mortgage holders are in financial stress even before an expected Melbourne Cup day interest rate rise goes ahead, paying at least 30% of their income to service their loans.

“Households diverting at least 30% of their disposable income to service a mortgage – a standard stress gauge – will account for 48.5% of total borrowers by the end of the year, according to the Australian National University’s Australian tax and welfare system model.

“The proportion rose from 26.7% in pre-Covid 2019 to 43.8% at the end of last year, and easily topped the 38.5% share of households in 1993, to be at record levels.”

This is bad news but it’s all good news for rate worriers and builds a case that the RBA should be ‘done and dusted’ with its excessive rate rises. All we need to see is some lower inflation readings in January and it will be a question of not whether they’ll cut, but more when they will.

I suggest the sooner the better. So, if you’re a term deposit player, you should be thinking that the next move for term deposits will be down. If you’re a stocks player, talk of ‘no more rate rises’ and the possibility of cuts will be great for stock prices, provided we don’t see any headlines about recession!

 

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