Australia Could Raise Rates Eight Times in Two Years: Ex-RBA Board Member
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“The bigger the household debt, the more impact a quarter percentage point increase in the policy rate will have on household spending,” he said. “In the Australian case, it is certainly possible that high household home mortgage debt will crimp consumer spending if the policy rate returned to what was once considered a relatively low long-term rate.”
?Still, Edwards noted that interest paid on Australian mortgages is much less than it was six years ago: while debt has increased, interest rates have fallen a lot. Payments are now 7 percent of disposable income compared with 9.5 percent in 2011, and 11 percent at the peak of the RBA tightening cycle before the 2008 financial crisis, he said.
Moreover, if the standard variable mortgage rate peaked at around 7 percent, that would still be nearly one percentage point below the 2011 level, and two-and-a-half percentage points below the 2008 peak, he said.
“The pace of tightening will anyway be governed by the strength of the economy,” Edwards said. “If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”
Australian government bond yields bounced this week in a dynamic manner to signal a low of at least near-term significance. A sustained move below 2.3% would now be required to question potential for additional higher to lateral ranging. With RBA short-term rates at an historic low of 1.5% since July last year the potential for the rate to be close to low suggests yields have likely bottomed.
The Australian Dollar trended lower between 2011 and early 2016 when it entered the current range. The rate has been trading mostly below 78¢ for the last year and is testing that area again following this week’s rally. A sustained move above that level would signal a return to demand dominance for the Australian Dollar.
Meanwhile the S&P/ASX 200 Index is trading in the region of the trend mean; having pulled back from the region of the 2015 peak near 6000. This has been a choppy advance since early 2016 so a break in the progression of lower rally highs evident since early May, with a sustained move above 5800 will be required to reassert medium-term demand dominance.
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