SYDNEY: Australians’ living standards are set to drop over the next 12 months, constraining the Reserve Bank of Australia’s (RBA) (pic) tightening cycle when it begins raising interest rates as soon as Tuesday, according to Barrenjoey Markets Pty.
“We’re going to see real wages continue to fall until the middle of next year,” said Jo Masters, chief economist at Barrenjoey, referring to inflation exceeding wages growth.
“It’s going to be an incredibly challenging period for the household sector.”
Australia’s A$2.2 trillion (US$1.6 trillion or RM6.9 trillion) economy is powering ahead and closing in on full employment, while inflation has accelerated to the fastest pace in 21 years.
Yet sentiment among households, carrying A$2.5 trillion (RM7.8 trillion) of mortgage debt, is slipping in expectation of higher borrowing costs and price rises.
That is a key reason why Masters expects the RBA to move cautiously when it begins.
Traders are pricing in a 15-basis-point hike to 0.25% at the May 3 policy meeting; rates are then seen climbing to 2% in October and 3.2% in April 2023.
“Beyond 2%, policy looks restrictive,” said Masters, who expects the RBA to raise next week. “You need to see how households have responded to the rate hike cycle at that point. I think that’s going to be one of the most important themes this year.”
Roughly 1.2 million Australians bought a property for the first time since the RBA’s last rate increase in 2010, according to Barrenjoey, suggesting a large swathe of homeowners have yet to experience a tightening cycle.
The household sector accounts for nearly 60% of gross domestic product, meaning spending patterns are critical to the economic outlook.
According to analysis by Goldman Sachs Group Inc, a one percentage point increase in borrowing costs over the next 12 months would raise households’ annual interest payments by about A$25bil (RM78bil).
Given interest income would also increase, Goldman pegs the net annual headwind at A$10bil (RM31bil), or around 0.5% of gross domestic product. — Bloomberg