Following the Reserve Bank of Australia’s (RBA) decision to lift the official cash rate by 25 bps to 3.85 per cent at its latest monetary policy board meeting, which Mr Oliver described as a “surprising” decision, he has warned that central banks could be going too far.
“A big factor in central bank thinking should be ongoing US banking stress,” Mr Oliver said.
“While the takeover of First Republic Bank by JP Morgan went smoothly with depositors protected, it and the prior ‘rescues’ leave three big issues unresolved and festering away.
“First, it’s unclear how the US government can pay for the deposit protections etc running the risk that Congress will get involved. Second, and far more importantly, it’s adding pressure on other banks to be more cautious in their lending to avoid going the same way.”
He added that the rescues also wiped out shareholders, which has made shareholders in other regional banks increasingly wary and is putting downward pressure on their share prices.
“It’s unusual to see the Fed continuing to raise rates despite this as after past crises it stopped,” Mr Oliver said.
“Similarly, it’s dangerous to see other central banks — like the ECB and RBA — not being more wary of this given the influence of the US economy globally.”
The economist said that due to a decline in inflation, and little new information since the previous meeting, he expected the RBA to pause for longer than just one month.
“The RBA’s Statement on Monetary Policy didn’t make any major changes to its forecasts, but it did revise its forecasts for this year a bit to show: slightly lower GDP growth of 1.25 per cent reflecting slower consumer spending and business investment; slightly higher unemployment of 4 per cent partly due to stronger population growth; and lower inflation of 4.5 per cent and trimmed mean inflation of 4 per cent, partly reflecting lower than expected inflation in the March quarter,” Mr Oliver said.
“Our assessment is that the RBA is underestimating the hit to consumer spending ahead — as revenge spending runs its course and as a significant proportion of home borrowers see prepayment buffers exhausted and with more than 15 per cent of borrowers now set to see negative cashflow this year — and that this will drive a faster rise in unemployment and quicker fall in inflation than the RBA is allowing for.”
Due to these factors, Mr Oliver said that AMP believes the RBA has “done enough” and that rates are at their peak.
“However, so far we have been wrongly too optimistic on this and the risk of a further increase in rates remains very high,” he acknowledged.
Mr Oliver added: “Our concern though is that the jobs market and inflation are lagging indicators and the RBA is not paying enough attention to the way interest rate hikes hit the economy with a lag. This in turn runs the rising risk of knocking the economy into a recession.
“Interestingly, the money market (which was well ahead of most economists in anticipating rate hikes for last year) is pricing in close to a zero chance of another hike and a 100 per cent chance of a cut by year end.”
Mr Oliver previously flagged the absence of any reference to the ongoing banking crisis in the US by the RBA, with Tuesday’s meeting coming just a day after US regulators confirmed the collapse of another banking institution — First Republic Bank.
“The bottom line is that each time this happens, more banks in the US will tighten their lending standards because they won’t want to go down the same path as these other banks,” Mr Oliver said.
“So, while you could argue there’s no full-blown crisis in the US and the authorities are mopping up the mess, it’s still going to lead to a tightening in lending standards, tighter monetary conditions, and weaker growth.
“So, I’m surprised they didn’t mention that, and I would have thought it is an argument to be a bit more cautious.”
