Westpac’s chief economist has cast doubt over the Reserve Bank’s forecasts and says the combination of falling house prices, electoral risk and tightening financial conditions rules out rate rises for three years.
Westpac’s chief economist Bill Evans has made the counter-consensus call that the Reserve Bank of Australia will keep interest rates on hold until 2021, casting doubt over its forecasts, and acknowledging that financial conditions are tightening in the absence of rate hikes.
Market economists see the cash rate increasing in the second-half of 2019, but Mr Evans on Tuesday extended his forecast for no change in policy settings until December 2020, from March 2020.
“Some may argue that we are unrealistically forecasting that Australia will completely miss the global rate hike cycle if rates remain on hold for such an extended period,” the economist wrote. “We differ from that view arguing that financial conditions are affected by more forces than just the RBA cash rate.”
Finance to residential property investors has declined in response to macro-prudential controls and likely to slow further after falling 25 per cent in the last year. Meanwhile wholesale funding costs have increased for the banking sector, and for companies.
That has led to a reduction in house prices in Sydney and Melbourne, expected to continue for the rest of this year and next. But the next circuit breaker to reverse falling house prices is going to be different than in previous cycles where rate cuts and rising incomes have worked to boost affordability.
That means a long period of house price weakness is required to reset the market and make it attractive for buyers to re-enter and stabilise the sector.
“Confidence will also be a factor that will discourage new entrants over the 2019 period as the economy deals with uncertainty around the electoral process. In that regard the parties have significant differences regarding tax policies for property investors,” Mr Evans wrote.
While Prime Minister Malcolm Turnbull narrowly survived a leadership challenge from Peter Dutton on Tuesday, support for the coalition government has collapsed according to the latest Fairfax-Ipsos poll which shows it trails Labor by 55 per cent to 45 per cent on a two-party-preferred basis.
Westpac also thinks the Reserve Bank’s inflation and growth forecasts are too optimistic.
“The key dynamic here is an expectation that the household can continue growing its consumption spending at around a 3 per cent pace,” which would require solid wages growth and any wealth-effect spillover from house prices to be neutralised. That seems unlikely, Mr Evans suggests.
Aside from ongoing macro-prudential supervision and regulation, “no further conventional tightening of policy through a rate hike from the Reserve Bank seems likely – even as far out as 2020.”
The minutes of the Reserve Bank’s August meeting, also issued on Tuesday, repeated the guidance that the next move in interest rates is probably up. Earlier, governor Philip Lowe told Australians to get their household budgets in order to prepare for higher rates – “at some point” – being almost eight years since the last increase.
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