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Will the Reserve Bank of Australia (‘RBA’) need to recalibrate its aggressive rate hiking strategy?
That question was put to Mark Bouris and many others following economic developments in the United States which has caused many to suggest that central banks across the globe will need to rethink their rate hiking strategy as a tool to control inflation.
Bouris was quizzed by Sky News host Peter Stefanovic on whether the RBA will look to cut interest rates in the wake of some major banks in the US collapsing as a result of interest rate hikes.
Bouris said that bank collapses are “exactly what happens” following aggressive rate hikes.
“You only have to go back to the GFC period when interest rates prior to the GFC were very, very high, then all of a sudden, you get collapses like Lehman Brothers.”
“Every time central banks hike rates at speed, particularly at the speed they have been hiking rates at the moment, something breaks. And that’s the whole program, the program is to break something.”
“It’s either to break our desire to spend more money, or something in the system will break because the system can’t handle it, which has happened in the US.”
“So my gut feeling is the RBA will be well aware of what’s just happened to the US. I’d be saying they don’t want to break anything here in Australia, not that our banks here are anywhere near the way they are in the US, our banks are much better managed and regulated.
“I dare say the RBA wants to be very careful.”
Bouris highlighted that economists are predicting another 0.25% increase to the current cash rate, leaving the official cash rate at 3.85%, but that will be the “terminal rate”. In other words, that will be as high as the official cash rate will go in this rate cycle.
“The terminal rate is now in the market at 3.85%. So in other words, the market is predicting a 25 basis points increase in either the next meeting or the meeting after that. And that’s it,” said Bouris.
This naturally begs the question: can mortgage holders expect interest rate cuts in the near future?
“I’m of the Westpac view,” said Bouris, “we’re likely going to see something up to seven rate reductions towards the latter end of 2024. I think their RBA is going to say, ‘inflation is still not managed, we still need to see the inflation signs reduce. So we’ll stay at 3.60% or 3.85% at the cash rate for a period of time just to break the back of spending.”
“So I think it’s going to take like six to eight months to do that, then we should see rate reductions … I think sometime next year,” he said.
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