(Bloomberg) --
Australians’ living standards are set to drop over the next 12 months, constraining the Reserve Bank’s tightening cycle when it begins raising interest rates as soon as Tuesday, according to Barrenjoey Markets Pty.
“We’re going to see real wages continue to fall until the middle of next year,” said Jo Masters, chief economist at Barrenjoey, referring to inflation exceeding wages growth. “It’s going to be an incredibly challenging period for the household sector.”
Australia’s A$2.2 trillion ($1.6 trillion) economy is powering ahead and closing in on full employment, while inflation has accelerated to the fastest pace in 21 years. Yet sentiment among households, carrying A$2.5 trillion of mortgage debt, is slipping in expectation of higher borrowing costs and price rises.
That is a key reason why Masters expects the RBA to move cautiously when it begins. Traders are pricing in a 15-basis point hike to 0.25% at the May 3 policy meeting; rates are then seen climbing to 2% in October and 3.2% in April 2023.
“Beyond 2%, policy looks restrictive,” said Masters, who expects the RBA to raise next week. “You need to see how households have responded to the rate hike cycle at that point. I think that’s going to be one of the most important themes this year.”
Roughly 1.2 million Australians bought a property for the first time since the RBA’s last rate increase in 2010, according to Barrenjoey, suggesting a large swathe of homeowners have yet to experience a tightening cycle. The household sector accounts for nearly 60% of gross domestic product, meaning spending patterns are critical to the economic outlook.
According to analysis by Goldman Sachs Group Inc., a 1 percentage point increase in borrowing costs over the next 12 months would raise households’ annual interest payments by about A$25 billion. Given interest income would also increase, Goldman pegs the net annual headwind at A$10 billion, or around 0.5% of GDP.
Data Wednesday showed annual inflation spiked to 5.1% last quarter, prompting a number of economists to fall in line with market pricing for a 15 basis point rate rise next week. These include Australia and New Zealand Banking Group Ltd, National Australia Bank Ltd. and Deutsche Bank AG. The latter reckons the central bank will follow up with a 50 basis point hike in June.
Australia’s wage price index for the first three months of this year is due out on May 18 and is unlikely to shift too much from the previous quarter’s 2.3%, implying a 2.8% decline in real wages.
Masters said there is also a “higher than normal” degree of uncertainty on the economic outlook right now, complicating policy makers’ task.
“We’re coming out of a global pandemic, we don’t know where full employment is and how the wage growth may respond to that,” she said. “We don’t know how such highly indebted households sector responds to tightening” of policy.
“And then of course, we’ve got the crisis in Ukraine. So I think it’s a really challenging period.”
©2022 Bloomberg L.P.
Advertisement