The Reserve Bank’s “shock” move this week signals that interest rates are likely to remain high for a long time, putting more pressure on equities and property, writes Christopher Joye.
in asset prices is once again proving to be precisely that. And signs of the worst default cycle since the 1991 recession are slowly emerging everywhere.
Indeed, the RBA framed its April pause as precisely that: a breather between hikes, as had occurred in the past. It is just that nobody really listened, which is not surprising given the RBA has been characteristically inconsistent, flip-flopping from a dovish to hawkish posture on a month-to-month basis.
A second factor has been the strong and sticky global inflation pulse in 2023, which does not engender confidence that core inflation will normalise back to the central banks’ legislated, circa 2 per cent targets anytime soon. The sudden cessation of house price falls across Australia, despite a reduction in borrowing capacity of more than 30 per cent, would have exercised the RBA which does not want a new positive wealth effect fuelling stronger consumer spending. Tighter monetary policy is meant to be powering a negative, not positive, wealth effect.Aussie house prices have already declined by one of their largest nominal margins on record in the period between 2021 and 2023.
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