Finance
Dark side of RBA interest rate cut millions are waiting for: ‘Disaster’
A top economist has warned Australian mortgage holders they could face interest rate hikes later this year should the Reserve Bank of Australia (RBA) cut interest rates today. The central bank is expected to cut the cash rate from its high of 4.35 per cent, marking the first time rates have been lowered in more than four years.
Judo Bank chief economic advisor Warren Hogan told Yahoo Finance it was still too early for the RBA to cut interest rates and the board risked driving up inflation before it was under control. Headline inflation eased to 2.4 per cent annually in December, while underlying inflation slowed to 3.2 per cent annually. This was its lowest in three years.
“It might sound attractive to a lot of Australians with mortgages to get a rate cut or two and save $50 a month in the short-term over the next six months, maybe even 12 months,” Hogan said.
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“But if that puts at risk rates going up by a percentage point or two, and then having to come up with actually not just that $50 back, but then another $100 or $150, do they really want that $50 right now and then putting at risk that it’s going to go up later?”
Hogan said the economy was recovering, with private sector demand starting to accelerate, strong employment, a jump in job vacancies, low unemployment and strong consumer spending.
“If you cut just as the economy is picking up and before inflation comes down, you risk not only stopping inflation coming down, but inflation going back up again, and then having to raise rates and not just a few times, a lot,” he said.
“That’s the disaster situation that we really must avoid, is rates going up a lot from here.”
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Hogan said this “disaster situation” could play out very quickly and the RBA could be forced to hike the cash rate to 5 per cent through 2026.
“What worries me is that a rate cut now lays the foundation for what we know all through history of the disaster, which is that inflation starts to rise again and they’ve got to really jack rates up until it really hurts,” he said.
“Of course, that’s when people who are vulnerable get hurt.”
Hogan said the RBA also risked damaging their credibility if they ended up needing to hike interest rates again to bring down inflation.
“It’s very important for central banks that people believe them when they say they’re going to get inflation down and keep it there,” Hogan said.
“If they have to turn around and start hiking at the end of the year, people will just go, ‘I’m not going to believe them’.
“They are already on thin ice and I think it’s a lot of risk to their credibility.”
Hogan said the RBA had already damaged their credibility when former governor Philip Lowe provided guidance that the bank wouldn’t raise rates until 2024.
Hogan said the RBA’s main job was to make sure inflation comes down.
“Low inflation is the single most important economic outcome a community needs. Inflation is diabolical. It destroys economies. It destroys societies. That’s it, bottom line,” Hogan said.
“Cutting rates does not get inflation down, it pushes it up.”
Hogan has been predicting the RBA will cut interest rates only twice in this rate-cutting cycle and won’t move until later this year.
Hogan said he can’t see the RBA cutting interest rates multiple times this year and this would also “look terrible from a credibility point of view” if the RBA cuts rates and it is a one-off ahead of the election.
“That is just going to look shocking,” he said.
All of the Big Four banks are predicting a cut on Tuesday, with Commonwealth Bank and Westpac expecting four cuts in the cycle, NAB five and ANZ just two.
A Yahoo Finance live blog will bring you expert predictions and commentary as the RBA decides the cash rate on Tuesday, February 18.