An increase in household debt during the COVID-19 recession will force the Reserve Bank to only gradually increase borrowing costs, the nation’s leading economists believe, although they warn official interest rates could easily climb above 3 per cent.
Ahead of the RBA’s March meeting on Tuesday, most economists in The Sydney Morning Herald/The Age Scope survey expect rates to remain on hold until August, with some saying home buyers could have respite until 2023.
The RBA has kept the official cash rate at a record low 0.1 per cent since November 2020, adding to its quantitative easing program that has pumped more than $400 billion into the economy through the recession.
The bank used its February meeting to end quantitative easing, and financial markets now expect it to lift the cash rate by more than a percentage point this year to deal with growing inflation pressures. The consumer price index rose 3.5 per cent through 2021 and is likely to lift higher through the first six months of this year.
But Scope members are not as hawkish about the bank’s interest-rate plans as financial markets, with most highlighting the level of housing debt taken on by Australians as a key factor.
St George chief economist Besa Deda, who believes the cash rate will peak at 1.75 per cent in 2024, said the sharp lift in debt meant interest-rate movements were more potent.
“As the overall level of household debt is relatively high compared to history and the cash rate is at record lows, future interest-rate increases will have a larger impact on households than in previous cycles,” she said.
AMP Capital chief economist Shane Oliver, who believes the cash rate will peak between 1.5 and 2 per cent in the next 18 months to two years, said higher rates would slow economic growth, the jobs market and housing to keep inflation under control.
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