The global ’tilt’ in post-COVID monetary policy, and what it could mean for property investors
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The strength of Australia’s post-COVID economic recovery prompted debate among analysts and investors about monetary policy.
Specifically — the pace at which the RBA will look to unwind the emergency policy measures it put in place to combat the pandemic.
And in research this week, CBA chief economist Stephen Halmarick put that policy transition in a global context by comparing the RBA’s outlook to other central banks in the ‘dollar bloc’; the USA, Canada and New Zealand.
In terms of what the RBA will do next, Halmarick said it’s important to understand that the bank doesn’t operate in a vacuum.
In other words, the RBA’s “future decisions on their unconventional monetary policy settings will be informed by the behaviour of other major central banks”.
For now, the RBA is holding to its prediction that rates won’t rise until 2024.
CBA thinks rate hikes will come as soon as 2022, which puts it “ahead of the consensus view”, Halmarick said.
How does that compare globally?
A common phrase in central banking parlance is that ‘all roads lead back to the Fed’, and CBA’s 2022 call for the RBA is slightly ahead of its prediction for the world’s biggest central bank.
By comparison, CBA’s international economics team said it currently expects the US Federal Reserve to start hiking rates in March 2023.
It then predicts the Fed will keep going until it reaches 1.5% in 2024.
Comparatively, CBA reckons Australia’s central bank will hike rates through 2023 before stopping in Q3 at 1.25%.
In previous economic cycles, 1.25% would’ve been considered a highly supporting policy setting.
But in the post-COVID world, CBA says that will reflect the new ‘neutral’ rate of interest — the middle ground where rates are neither overly supportive or overly restrictive.
So while rates aren’t expected to rip higher, the outlook represents a “tilt” in post-COVID monetary policy.
And Halmarick said it’s a tilt that will be “one of the key factors impacting on economies and markets in the years ahead”.
If interest rates do start to rise at the end of next year, it will mark a shift in the rock-bottom rate settings that have helped spur a boon in Australia’s property market.
In a research note earlier this month, CBA economist Belinda Allen detailed the kind of changes that might be in store if rates start to rise.
One useful benchmark Allen highlighted was the collective interest payments made by mortgage holders as a percentage of disposable income.
For the March quarter, that figure amounted to 3.1%. As a guide for higher rates, Allen compared that to the last time Australia’s inflation rate fell within the 2-3% band targeted by the RBA.
At the time (in 2014), the interest payments/disposable income ratio was 5.3%. If benchmark rates climb back to 1.25% (in accordance with CBA’s forecast), that would bring the ratio back to 2014 levels of around 5%.
In assessing the outlook for housing, Allen also flagged the post-COVID activity in mortgage offset accounts.
The total stock of money flowing to offset accounts ripped higher in the last nine months of last year, to more than $200 billion (from ~$170bn pre-pandemic).
The move was part of a broader increase in Aussie savings accounts, which CBA estimates rose by more than $100bn.
“This suggests there is an inbuilt buffer for many households when interest rates rise,” she said.
In addition, small lending changes are already taking place, starting with some subtle uplifts in fixed rate mortgages by some lenders.
There’s also evidence that banks are applying a higher interest rate floor in mortgage assessments.
“This is another developing headwind for the housing market but highlights the focus on serviceability in a rising interest rate environment,” Allen said, adding that “it also reduces the need for macro-prudential measures to be reintroduced”.