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Alan Kohler: Economists disagree on where interest rates are heading – shock

As for what comes next for interest rates, economists are all over the place, writes Alan Kohler.

As for what comes next for interest rates, economists are all over the place, writes Alan Kohler. Photo: TND

Australia’s assembled economists were agreed on Tuesday that the cash rate would be raised by 0.25 per cent, but as for what comes next, they’re all over the place.

In fact, it’s hard to recall a time when the interest rate forecasts of economists were as widely, and wildly, different as they are now.

At one extreme is Stephen Anthony and Warren Hogan predicting a peak cash rate of 4.5 per cent – basically rate hikes throughout next year.

At the low end of the scale are Gareth Aird, Craig Emerson, Shane Oliver and Michael Blythe predicting 3.1 per cent – that is, one more rate hike in December.

The first two are basically saying a recession will be needed to control inflation; the others are saying that inflation is already tipping over and the Reserve Bank should pause to see what happens, and then probably won’t need to do more.

None of those people came down in the last shower.

Stephen Anthony is one of the nation’s top macroeconomists, formerly with Treasury and the Department of Finance, then industry super funds and now has his own firm, Macroeconomics Advisory.

Warren Hogan was chief economist for ANZ Bank for 10 years after a stint with Westpac. He then joined Commonwealth Treasury and UTS Business School, and now advises Judo Bank.

At 41, Gareth Aird is the youngest of this group. He’s head of Australian economics at Commonwealth Bank and before that was working for the UK government and NSW Treasury.

Craig Emerson has a PhD in economics and worked for the United Nations before going into politics and becoming a minister in the Labor governments of Julia Gillard and Kevin Rudd. He also now has his own consulting firm.

Shane Oliver has been chief economist at AMP for 22 years.

Michael Blythe was chief economist at Commonwealth Bank for 25 years and before that was at the Reserve Bank for 12 years. He now runs his own firm called PinPoint Macro Analytics.

Among the rest of the big four banks, David Plank of ANZ (six years there and before that, 18 years with Deutsche Bank) and Bill Evans of Westpac (32 years as chief economist of Westpac!) are both predicting a peak cash rate of 3.85 per cent. Alan Oster of NAB (30 years there, following 15 years with Commonwealth Treasury) thinks it will be 3.6 per cent.

Furious disagreement

By the way, none of the bank chief economists has to run their predictions past their bosses, the bank CEOs – they have complete “editorial independence” (the CEOs need deniability, and usually talk their book anyway).

In other words, each of these blokes has decades of experience – about 250 years between them – and they know what they’re talking about. What’s more, they form their views entirely independently based only on the data and their experience.

Yet they are in furious disagreement about where interest rates are heading.

There is also a disagreement between Treasury and the Reserve Bank. The budget papers assume there will be no wage price spiral, but RBA Governor Philip Lowe is warning that there will be one – a key reason interest rates have already been increased seven months in a row.

The other forecast worth mentioning in this context is the cash rate futures market, where traders bet actual money as opposed to writing notes for clients. It’s predicting a peak cash rate of 3.95 per cent.

I have also had decades of experience, but happily I’m not employed to make interest rate predictions, so unlike those economists I can admit that I wouldn’t have a clue where the cash rate will end up.

Recession or no recession – that is the question

But I can say this: If Stephen Anthony and Warren Hogan are right, Australia will have a nasty recession; if Gareth Aird, Craig Emerson, Shane Oliver and Michael Blythe are right, it won’t. It’s as simple, and as complicated, as that.

So why do Anthony and Hogan think the Reserve Bank will have to hike the cash rate to above 4 per cent?

Hogan says: “The idea that you can get rid of 6 per cent core inflation with a 3 per cent cash rate is insane.”

Does he think there’ll be a recession? “There’s a good chance of one. I think there’ll be a long period of below-trend growth, and during that there could easily be a technical recession – two quarters of negative GDP. But I don’t think there’ll be a ‘crisis recession’, and unemployment will rise to no more than 5 per cent.”

Stephen Anthony told me: “It seems to me this thing we’re in will take longer to curb the inflationary impulse. The less aggressive they are, the longer it will take.

“This is a very unusual downturn, by the way, complete with a scarcity of labour and a lot of pent-up demand.”

Bill Evans (3.85 per cent) is expecting 1 per cent growth next year and 2 per cent in 2024 – no recession, although he recognises that with such low growth it is a risk.

David Plank (3.85 per cent) is also not expecting a recession in total GDP, and is forecasting 2 per cent growth next year, but he does think there’ll be a “per capita recession”.

He says: “Australia’s economic performance has been exaggerated by population growth – we’ve had lots of per capita recessions over the past 20 to 30 years.”

Shane Oliver (3.1 per cent) says 1.3 million Australian households are “very vulnerable”, and points out that real wages are still declining.

Gareth Aird (3.1 per cent) says we are already past peak labour market tightness and he points to the line in Tuesday’s statement from Philip Lowe that “if the situation requires us to hold steady for a while, we will do that. Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”

Aird says: “That’s the first time Lowe has mentioned pausing. I think we are close to that pause.”

So do I. Or at least I hope so, and I hope that Stephen Anthony and Warren Hogan are wrong.

Alan Kohler writes twice a week for The New Daily. He is also founding editor of Eureka Report and finance presenter on ABC news

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