- Former board member John Edwards: RBA could increase interest rates 8 times in the next 2 years
- Support: RBA probably considering a program of rate increases given its forecasts for inflation returning to target and economic growth to accelerate to 3% against a stronger global backdrop
- Theorising that the long-term cash rate is about 3.5% — lower than 5.2% average of the past two decades — and the RBA wants to start tightening in 2018 and reach its goal within 2 years, that would require four quarter-point increases each year.
- If the economy operates at the level the RBA predicts, at 3% output growth and 2.5% inflation, it would think if a sustainable or natural policy rate of at least 3.5%
- If the economy does grow to predicted extent by 2019, RBA will need to raise the interest rate to at least 3.5% by 2019 – these rises thus must be soon as they can only be done in small movements.
- Risks of rate increases alongside high household debt, as most home loans are on variable interest rates closely tied to the RBA’s cash rate.
- Edwards noted that interest paid on home loans is much less than it was six years ago: while debt has increased, interest rates have fallen
- Debt payments are now 7% of disposable income compared with 9.5% in 2011, and 11 % at the peak of the RBA tightening cycle before the 2008 financial crisis.
- There are multiple possibilities that would result in a rate hikes delay:
- household spending weakness
- long expected firming of non-mining business investment is further delayed
- Australian dollar strengthens
- employment growth continues to be weak
- RBA as already allowed a small tightening of monetary policy as banks have increased the price of investor and interest-only loans.
- High household debt means rate hikes will have to be small and very gradual