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Source: Yellow Brick Road/AAP
A leading economist has warned that Australian mortgage holders might confront interest rate increases later this year if the Reserve Bank of Australia (RBA) lowers rates today. The central bank is anticipated to reduce the cash rate from its peak of 4.35 percent, marking the first reduction in over four years.
Warren Hogan, the chief economic advisor at Judo Bank, stated in an interview with Yahoo Finance that it is premature for the RBA to cut rates, cautioning that doing so could drive inflation higher before it is contained. Headline inflation fell to 2.4 percent annually in December, while underlying inflation decreased to 3.2 percent annually, its lowest level in three years.
“To many Australians with mortgages, a couple of rate cuts that save $50 monthly in the short term might seem appealing over the next six months to a year,” said Hogan.
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“However, if this leads to increases of one or two percentage points later on, resulting in not just recovering that $50 but potentially an additional $100 or $150, is that short-term benefit worth the risk?”
Hogan noted that the economy is on a recovery path, with growing private sector demand, robust employment, an increase in job vacancies, low unemployment, and strong consumer spending.
“Cutting rates just as the economy is gaining momentum and before inflation is under control could potentially halt the decline of inflation and possibly trigger an increase again, prompting multiple rate hikes,” he warned.
“This is the catastrophic scenario we must avoid, where rates spike dramatically from this point.”
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Hogan indicated that this “catastrophic scenario” could unfold swiftly, necessitating an increase of the cash rate to 5 percent by 2026.
“What concerns me is that a reduction now might set off a series of events leading to rising inflation again, forcing a significant rate hike later,” he added.
“Naturally, it is the vulnerable who suffer most in such cases.”
Hogan highlighted that the RBA could undermine its credibility if it is required to increase rates again to tackle inflation.
“It’s crucial for central banks to maintain public trust when they assert their commitment to controlling inflation,” Hogan emphasized.
