Michael Pascoe: No, the headlines are wrong – the RBA is pushing rates higher

The devil is in the detail in the RBA’s Statement on Monetary Policy,  Michael Pascoe writes.

The devil is in the detail in the RBA’s Statement on Monetary Policy, Michael Pascoe writes. Photo: TND

While all the headlines say the Reserve Bank decided to keep rates steady, the ugly truth was tucked away in the fine print of the bank’s Statement on Monetary Policy: Interest rate pain will worsen this year, interest payments will take a steadily bigger bite out of household budgets that are already squeezed, monetary policy will continue to tighten its grip when the recent economic data is screaming that the RBA has done enough.

According to the bank itself, interest payments on households’ debt will take 14 per cent more of total household disposable income by the end of the year.

The bank also effectively admitted it had no idea what “full employment” might mean in terms of our unemployment rate, saying it was even possible we already were at full employment with a 3.8 per cent unemployment rate, despite its forecasts indicating the bank wants 4.4 per cent unemployment to achieve its inflation rate target of 2.5 per cent.  I’ll come back to that.

First though, what has been missed: The SoMP states interest charges for mortgage and consumer credit are presently taking about 7 per cent of household disposable income and that will rise to 8 per cent, assuming no change in the bank’s cash rate.

And that’s a full percentage point extra to come off disposable income that is forecast to still be going backwards in real terms for most of this year.

Mortgage pain to rise

But, of course, the extra pain is not spread evenly – that total figure of 8 per cent of disposable income is averaged down by the many households that have little debt. Roughly 60 per cent of us don’t have a mortgage.

The RBA says for mortgage holders, scheduled repayments took a record 10 per cent of disposable income in the December quarter.

The SoMP did not offer an estimate for what that will be by the end of this year and the bank was not immediately forthcoming with a figure, leaving me to guesstimate if rising interest rates are taking an extra 100 points off everyone, they must be taking at least 200 points off those servicing mortgages – call it 12 per cent of disposable income.

As the SoMP states: “Interest payments on household debt will increase further as expiring fixed-rate mortgages roll off onto higher rates and the November cash rate increase continues to flow through to mortgage payments.”

The bank’s forecasts are based on the technical assumption of what the money market is expecting – that the cash rate will remain where it is until the middle of 2024.

The bank says “most” of the households with a mortgage “are well placed to manage mortgage rates around their current levels by continuing to curtail spending, saving less or drawing down on savings buffers”.

“But around 5 per cent of borrowers are currently estimated to have insufficient income to meet their most essential expenses and mortgage payments, and so are drawing down on savings or finding other ways to increase their income or reduce expenditure. Some of these borrowers are at risk of depleting their buffers within six months, which would see them fall behind on mortgage payments.”

The bank’s business liaison found demand for assistance from community services organisations remained “very strong”.

“Contacts in this sector continue to see requests from people who have not previously sought assistance, including wage earners and those with mortgages.”

Data mismatch

Governor Bullock on Tuesday repeatedly said the bank’s decisions are data driven. That doesn’t match with the decision to leave rates steady.

Consumption has plunged, inflation has fallen further and faster than expected, the bank says wage rises are in keeping with its inflation target and its business liaison reports it is harder to increase prices and most firms anticipate wages growth to slow over the year to about 3.5 per cent.

“This slowing reflects expectations of lower inflation and award rate outcomes in the coming 12 months, as well as increased need to reduce business costs and a slowing labour market.”

We translated the RBA-speak for the November rate rise at the time as the bank wanting more pain and higher unemployment, the bank not knowing what was happening but increasing rates again anyway. Subsequent data proved that correct.

A seasoned monetary observer explained the Chris Caton adage of interest rates going around in pairs as being because one move doesn’t make a material difference. “Either this one is unnecessary or there’s more to come.”

Nobody expects there are more to come, so November was unnecessary.

Unnecessary hike?

The SoMP makes a strong case for reversing the November rate increase, but the board isn’t moving. Instead, the post-meeting statement talked tough about being prepared to lift rates again.

I’m not surprised. It would be too embarrassing for the board to admit it made the mistake.

At the post-meeting media conference, governor Michele Bullock was asked point blank if the November increase was a mistake. She said it was not.

The Mandy Rice-Davies cliché applies – she would say that.

It could be more interesting and perhaps elicit a more nuanced reply to ask if, with the benefit of hindsight, the November increase has proven unnecessary given inflation and consumption were already tumbling.

But probably not.

The board lifted rates in November because its August forecasts were wrong – the September-quarter CPI was higher than it guessed.

Now its November forecasts have been proven wrong, too – the December-quarter CPI was lower by a bigger surprise than the previous one was higher. The bank’s inflation outlook is back on the glide path it had for the four meetings before November when it held steady.

And, as already mentioned, other data and expectations have shown greater weakness.

But central banks don’t like admitting mistakes.

Flummoxed by ‘full employment’

As for what “full employment” might be – and therefore when the RBA will stop seeking higher unemployment, it is in some ways encouraging that the bank effectively admitted it doesn’t know and its computer models certainly don’t.

Asked a couple of times if she had a figure in mind for what full employment (or the old NAIRU, the non-accelerating inflation rate of unemployment) might be, Bullock admitted she did not.

“Given the substantial uncertainty involved with each of the model estimates, it is possible that labour market conditions are already consistent with full employment, but the probability is relatively modest,” states the SoMP.

The encouraging bit is that the bank is now considering that the current unemployment rate of 3.8 per cent or thereabouts might be OK.

But experience says the bank won’t know what it is until it has overshot the target and unemployment has gone higher.

By then, it will be too late for unknown tens of thousands of unnecessarily unemployed people to retract the November rate mistake, too late for that 5 per cent of mortgage holders who already can’t make ends meet and a bigger number who are finding it hard to keep the lights on and pay for visits to the doctor. Forget the dentist.

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