Bendigo and Adelaide Bank: Monthly outlook for rates, markets, the economy, and property values
Bendigo and Adelaide Bank's Chief Economist, David Robertson has today released his monthly report card into the Australian economy, revealing Australian homeowners should expect two further interest rate hikes ahead of Christmas and again in February next year, taking the Official Cash Rate to a ‘neutral setting’ in early 2023.
“The RBA delivered its seventh consecutive rate hike this week, adding to the record cumulative increase in the Official Cash Rate this year; but thankfully again only 25 basis points, as forecast last month. We expect a further increase of this size in December and February, taking the Official Cash Rate to 3.35 percent, or a ‘neutral’ setting’,” Mr Robertson said.
“The logic behind the quarter percent increase (in contrast to the US and UK hiking rates 3/4 percent this week) centred on the lag between rate hikes and seeing an impact on the real economy, the likely decline in inflation next year as supply chains gradually repair, and the fact that the RBA meet monthly, unlike most other central banks.
“The key question ahead for 2023 is whether a neutral rate will be sufficient to tame inflation, particularly after last week’s CPI figures showed a rise in core inflation to 7.3 percent, more than double target at 6 percent.
Mr Robertson said that while he expected a more restrictive RBA cash rate would pose stronger headwinds to some asset values, forecasts point to a plateau in rates next year, in the mid threes.
“Monetary policy will do its part in tackling inflation but fiscal policy faces challenges via structural deficits ahead due to an ageing population and a lack of productivity growth,” Mr Robertson said.
“Government net debt as a percentage of GDP is very low as detailed in the October budget at 22.5 percent, keeping our coveted AAA credit rating safely intact. Deficits are forecast to build from financial year 2025 however suggesting the nation has around three years to lift productivity via structural reform to address these challenges ahead.”
Equity markets
“Markets are trying to look on the bright-side here and overseas, with investors weighing up the certainty of further rate hikes against the hope that tightening cycles are closer to topping out, with the latest corporate earnings generally beating expectations,” Mr Robertson said.
“Our bear market for stocks hasn’t been as dramatic as many elsewhere, so like many aspects of the last few years not only is volatility high, but variances between and even within sectors are remarkably wide.
“Once again, the fate of asset values is at the mercy of just how high rates will reach, as well as which sectors, businesses and asset classes can best cope with higher rates.”
Property values
Lastly, residential property values fell another 1.2 percent nationally in October, 6.5 percent from their peak in capital cities, and 5 percent for regional property.
“Once again there are huge variances by location, but on average values are down 6 percent from their peak, having risen just over 28 percent during the pandemic,” Mr Robertson said.
“This downturn obviously has further to run but is being helped by the strong jobs market and the likely pickup in net migration.”
To see David’s market update video, please visit: https://youtu.be/eEfcAfJ1-GA
