RBA revises up forecasts

In its latest Statement on Monetary Policy (SOMP) for November 2023, the Reserve Bank of Australia (RBA) has projected that scheduled mortgage payments are projected to increase to approximately 10.5 per cent of household disposable income by the end of 2024, based on the increases to the cash rate to date.

According to the RBA, scheduled mortgage repayments as a share of household disposable income have increased by 2.5 percentage points since the March quarter of 2022, with expectations that this will rise further as more and more borrowers roll off their fixed-rate loans onto higher rates.

Scheduled mortgage repayments (interest plus scheduled principal) rose to 10 per cent of household disposable income during the September quarter, above the central bank’s previous estimate of around 9.5 per cent at “the previous historical high”.

The board noted, however, that households have “substantially reduced their stock of personal debt in the past 15 years”, with the overall debt servicing burden for households sitting lower than it did in 2008.

Furthermore, the RBA has revised its assumed peak of the cash rate to 4.5 per cent, before dropping to 3.5 per cent by the end of 2025.

“The path for the cash rate reflects expectations derived from surveys of professional economists and financial market pricing,” the board stated.

The November monetary policy meeting saw the RBA raise interest rates for the 13th time in its tightening cycle, up to 4.35 per cent, breaking a four-month streak of holds.

Additionally, the central bank has upgraded their inflation forecasts, however, is still steadfast in its stance that inflation will return to the target of 2–3 per cent by the end of 2025.

The RBA foresees annual inflation to reach 4.5 per cent by 4Q23 and 3.5 per cent in the same quarter in 2024.

The RBA highlighted that the risk of “inflation remaining higher for longer has increased” while “medium-term inflation expectations have remained anchored to date”, but are beginning to rise.

“These could rise further if upside risks to the forecasts were to materialise,” the RBA stated.

Commonwealth Bank of Australia (CBA) economists Gareth Aird and Stephen Wu noted that the RBA is “willing to raise the cash rate again if the economic data, particularly around inflation, comes in stronger than their updated forecasts”.

“Our economic forecasts inform our call on the cash rate over the medium term. Our base case sees the RBA on hold until September 2024, when we have pencilled in the start an easing cycle,” CBA’s economists said.

“We have 75 basis points (bps) of rate cuts in late 2024 and a further 75 bps of easing in 1H25, which would take the cash rate to 2.85 per cent (this assumes no further increases in the cash rate).”

ANZ senior economist Adelaide Timbrell said that the RBA’s SOMP has not altered the major bank’s view that the central bank is on an extended pause.

“Risks are, however, skewed towards further tightening in the near term,” Ms Timbrell said.

“Rate cuts are still far away. The RBA noted that ‘persistently high inflation remains the major concern for central banks in advanced economies.’”

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