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Sorry, I doubt the RBA will be raising interest rates eight times over the next two years

Michael Pascoe

Nothing like a former Reserve Bank board member saying the RBA could hike interest rate eight times in the next couple of years to get attention.

I could also win Oz Lotto – "could" is rather vague word.

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What if interest rates go up?

Even a small hike can have a big effect on the hip pocket.

To be more precise, John Edwards wrote on the Lowy Institute website that it was "distinctly possible" rates could be up "something like" 200 points over 2018 and 2019 "if the RBA's economic forecasts prove correct".

That's a considerable qualification. The RBA admirably acknowledges its forecasts are like everybody else's – best guesses. Each quarter it publishes the reliability range of its forecasts. It's rather wide. 

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With that qualification, "distinctly possible" is still much firmer than a vague "could" but it's well short of saying it's probable. Edwards did not predict eight rate hikes over 2018 and 2019 – but that didn't stop immediate large headlines.

And the reason he pulled up a long way short of such a prediction was buried as the final 42 of his nearly 2,000 words:

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"The pace of tightening will anyway be governed by the strength of the economy. If household spending weakness (sic), if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid."

In other words, there are plenty of reasons for the "distinct possibility" not coming to pass, especially the possibility of weaker household spending.

What Edwards was really saying over the 2,000 words is that the RBA will be thinking about lifting rates, that the next time it moves, it will probably be up. That naturally follows from what are quite optimistic forecasts for 2018 and 2019.

As has been previously opined, the RBA has already allowed a little tightening of monetary as banks have increased the price of investor and interest-only loans. It would take an absolutely Goldilocks economy though for the RBA to go as hard and fast in lifting its cash rate as the Edwards coverage suggested.

Quite simply, the extent of household debt means our central bank will only have to feather the brakes to get traction. The peak of the next rate cycle is quite likely to be a cash rate 200 points above where we are now, but the debt level means we're unlikely to get there in an enormous rush.

There's good reason to look forward to the cash rate increasing, to getting back to something more like normal, because it would mean the economy is humming with unemployment and underemployment down, inflation comfortably up, businesses merrily investing, wages growth nicely strong and the Bledisloe Cup back in Australian hands. OK, maybe five out of those six anyway.

In the meantime, it is sensible to plan on rates rising in a happier world. That's why banks stress test borrowers' ability to handle mortgage rates 300 points higher. It's prudent, but it's not a prediction. 

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