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Markets tip decade-high rates as local recession fears grow

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If Australian interest rates increased to 4.1 per cent, taking ordinary loan rates to about 7 per cent, the repayments on an $800,000 mortgage would rise above $5000 a month. In April, ahead of the RBA’s first rate rise, repayments on the same mortgage were around $3000 a month.

A 30 per cent fall in house prices would in effect wipe out the coronavirus pandemic run-up in values across most capital city markets and leave many mortgagors holding property worth less than they paid.

The ratcheting up of interest rate expectations follows aggressive actions by some of the world’s most important central banks over the past 48 hours.

They included Sweden, which lifted its target interest rate by a full percentage point, the United States, South Africa and Switzerland (all by 0.75 percentage points), and Britain, Norway, Indonesia and the Philippines, which lifted their rates by half of a percentage point.

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That is after increases earlier this month by the RBA, New Zealand, the European Central Bank and Canada.

Economic indicators are also increasingly pointing to a global downturn. The closely watched US Conference Board leading index, released on Friday morning, fell for a sixth consecutive month in August and is now down 2.1 per cent from its February high.

“A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures. The Conference Board projects a recession in the coming quarters,” the board’s senior economics director, Ataman Ozyildirim, said.

Oliver said financial markets were heavily focused on the actions of America’s Federal Reserve, which has signalled it is prepared to drive the world’s largest economy into recession to kill inflation pressures.

But he argued local markets were ignoring the key differences between the Australian and US economies.

While most Americans are on 30-year fixed rates, in Australia people are either on variable mortgages or short-term fixed rates. The level of household debt carried by Australians is also double that of American home buyers.

“The Fed is possibly making a huge policy mistake. It doesn’t mean we have to go over the same cliff here,” he said.

Barrenjoey chief economist Jo Masters said in light of the Fed’s actions, the RBA was likely to push official interest rates to a peak of 3.35 per cent early next year.

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That would probably leave the country in a shallow recession, forcing the RBA to reverse monetary policy in the second half of 2023.

“As the data confirms rapidly weakening domestic activity, we expect the RBA will start an easing cycle in the December quarter 2023,” she said.

“This should be sufficient to leave any recession as relatively short and shallow, and perhaps that is what is needed to cement the path back to 2 to 3 per cent inflation. A narrow path has just become even narrower.”

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