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Economist Saul Eslake predicts Australia’s interest rate growth will slow

Economist Saul Eslake predicts Australia's interest rate growth will slow

There is a glimmer of hope for Australians fearing more interest rate pain, with a leading economist predicting the massive hikes could soon start to ease.

On August 2, the Reserve Bank of Australia raised interest rates for a fourth consecutive month, bringing them to a six-year high of 1.85 per cent.

It was also the third month in a row the cash rate rose by 0.5 per cent, the fastest interest rate growth Australia has experienced in almost 30 years.

The RBA has made it clear interest rates will continue to go up as it attempts to bring soaring inflation levels down.

But independent economist Saul Eslake, former Bank of America Merrill Lynch chief economist (Australia and New Zealand), believes interest rates will not rise as high as some are predicting.

“I think the Reserve Bank is of a mind to get it (interest rates) up to about 2.5 per cent by the end of the year. That could be either 2.35 per cent or 2.6 per cent,” he told NCA NewsWire.

“Then they will be able to pause to assess the impact of what they by then will have done.

“In my view, that may well be enough to slow the economy sufficiently.”

Mr Eslake said raising the cash rate to 2.35 or 2.6 per cent should be enough to achieve the RBA’s goal of slowing down the growth of domestic spending to counter inflation.

“As customers do have to start paying for the rate increases that have been announced, you should see spending slow quite a bit,” he said.

“The other part of the answer is that there is now starting to be some evidence to suggest that the global sources of inflationary pressure have peaked.”

Mr Eslake’s projection goes against what the country’s big four banks have previously predicted after they all unanimously forecast more pain for Australians.

NAB expected the cash rate to sit at 2.85 per cent by November, while Westpac forecasted it would rise to 3.35 per cent by February next year.

But Westpac’s forecast was not as dire as ANZ’s, who expected the cash rate to rise above three per cent before the Christmas holidays.

“Our expectation is that the RBA will deliver this via four more successive 50 basis point rate hikes in August, September, October and November,” ANZ’s head of Australian economics, David Plank, wrote in July.

“This 200 basis points of additional tightening sees the cash rate target at 3.35 per cent by November.”

The CBA forecasted the cash rate will sit at 2.60 percentage points by November.

Mr Eslake acknowledged and did not dismiss these projections, but expressed concern over what it could mean for the Australian economy.

“My view would be that if the Reserve Bank does end up going straight to 3 per cent or 3.5 per cent… there will be a much greater risk of a sharper slowdown in the Australian economy,” he said.

RBA Governor Philip Lowe has previously said he expects they will take further action on interest rates, but indicated those changes are not “pre-set” and subject to incoming data at the time.

“The Board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path,” he said in a statement following the August hike.

“The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.”

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Business

Economy: Winners of rising interest rates revealed

Economy: Winners of rising interest rates revealed

Homeowners and renters are bracing for more bad news with interest rates tipped to rise again, but there are some people who are benefiting more than others.

Household budgets are being stretched to their limits after inflation hit a massive 6.1 per cent and cost of living pressures, including the prices of groceries and fuel, continue to mount.

But financial experts say some parts of the community are enjoying economic success during this difficult time.

So who are the winners of rising interest rates?

Financial planner and Edith Cowan University lecturer Damon Brown told NCA NewsWire there were two big winners — withdraw and people who locked in fixed rates before the cycle changed.

“Retires who are invested in cash have been doing it tough for the past five years because interest rates on their cash have been very low and below what Centrelink deems them to be earning,” he said.

“For the older people Centrelink deems them when it comes to their the age pension they can receive.

“So it’s called deeming, which is what the Centrelink assumes they can earn from their money, but they might not actually earn that money.

“An example might be my mother who invests all her money in cash. She’s been receiving one per cent interest rate for the last few years but Centrelink assumes that she earns a bit more than that. And so she’s receiving less Centrelink entitlement.”

Mr Brown said people who locked in fixed rates before the cycle changed, like him and his wife who secured a rate just under two per cent, were also doing well.

“We actually locked in for three years a year ago, so we’ve still got another two years to take the big difference,” he said.

Daniel Kiely, a senior research fellow at the Bankwest Curtin Economics Center, told NCA NewsWire rising interest rates were not necessarily a bad thing.

“If the increase in interest rates that we are seeing both in Australia and in other global jurisdictions flow through to the economy, and in turn lead to lower inflation, we will all be winners in the long-run.” he said.

“Lower inflation will make it more unlikely for a global recession to occur.”

In the shorter-term, Dr Kiely said savers would get higher returns on their savings accounts, but the speed at which this occurred would vary from bank to bank and depending on the type of savings account.

“Withdraw may benefit too, if savings supplement another source of income such as a pension,” he said.

“However, for savers and retirees to see the full benefit of such returns, inflation will need to come down substantially.”

Dr Kiely said there was a double edge sword for potential homeowner investors.

“Higher interest rates may stem house price increases and help those saving for a home,” he said.

“But, higher interest rates will also reduce borrowing capacity for many wishing to enter the housing market.”

LCI Lending partner Domenic Romeo said there were still more losers than winners.

“However, the people who have savings in a term-deposit or savings account will benefit from higher interest income rates,” he said.

“Some property investors may find themselves in a better position to purchase a property, due to the softening property prices too.”

In this month’s Finder RBA Cash Rate Survey, 26 experts and economists agreed the cash rate would change on Tuesday, with 23 of them predicting another increase of 50 basis points.

That would bring the cash rate to 1.85 per cent in August.

“A 50 basis point rate increase will see the average Aussie homeowner forking out an additional $610 per month compared to what they were paying four months ago,” Finder’s head of consumer research Graham Cooke said.

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