As Australians continue to seek to gr -ple with the emotional, mental and financial roller coaster ride of the Covid-19 pandemic, we have seen precisely how quickly our circumstances can change on several occasions.
In just a few days, the zero-covid existence that most Australians enjoyed for the vast majority of the pandemic can be broken. Replaced by lockdowns, insecurity and everything that goes with it.
As circumstances continue to move r -idly in Australia, the outlook for interest rates will change too. Just days before Sydney entered its current lengthy lockdown, the interest rate futures markets priced in several rate hikes over the next few years.
That outlook has changed dramatically since it became clear that the Sydney lockdown would drag on and the risk of Delta variant locks across the country increasing.
According to analysts at the Commonwealth Bank (CBA), the country’s economy is expected to contract by 2.7 percent in the September quarter. For comparison: Throughout the entire recession of the 1990s, GDP fell by a total of 1.7 percent.
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A negative cash rate
With Sydney’s lockdown expected to last until mid-November, according to the CBA, they have changed their outlook and now expect the Reserve Bank’s first rate hike to come in May 2023.
But even before it became clear that Sydney’s lockdown would be measured in months and weigh heavily on household wealth, banking regulator -RA was already urging banks to prepare for a negative RBA cash rate.
As concerns arise about the strength of the global economic recovery from the pandemic, the RBA isn’t the only major central bank considering a negative interest future.
In February, the Bank of England gave British banks six months to prepare for the introduction of negative interest rates.
In J -an, Denmark and Switzerland there have been negative interest rates for years.
While the effectiveness of negative interest rates in stimulating economic growth is questionable and a source of significant controversy, it is likely to remain the next step for central banks when the next crisis comes.
As several Chinese megacities try again to limit transportation and consider restrictions in the event of a delta variant eruption, the vulnerability of Australia and the world’s economic recovery is becoming clear.
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The China Effect
It was once said that “when China sneezes, Australia catches a cold” (in economic terms).
Aside from the irony of that statement amid a global pandemic that began in China, the effects of massive Chinese government incentives are fading and economic data in the Middle Kingdom continues to deteriorate.
For the Australian economy, a significant slowdown in China could hardly come at the worst time. According to the CBA, up to 300,000 jobs could be lost due to Sydney’s protracted lockdown, making Australia an increasingly divided nation economically, with some states moving forward while others falling behind.
Despite projections of a strong recovery for the country’s economy in the December quarter, a double-dip recession is a very real possibility if lockdowns last longer than expected or if a global slowdown begins to affect our economy.
Because these scenarios present a number of potentially extremely challenging circumstances, the prospect of the RBA moving to negative interest rates offers both a silver lining and a hurricane with dark storm clouds, depending on your perspective.
If the RBA cut the cash rate below 0 percent, it would likely not only keep house prices skyrocketing, but likely even into a neighboring galaxy if the economic situation weren’t too bad.
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skyrocketing house prices
If interest rates fell to the lowest levels they were likely to ever hit, Australian mortgage owners and homeowners could raise trillions of dollars in collective equity to their homes.
But for potential first-time buyers and those who don’t own a home, this would be another quick kick to their fortunes, especially those in areas hit by the ongoing lockdowns.
If you had told anyone two years ago that a global pandemic, projections of 300,000 jobs lost, and the possibility of a double-dip recession in Australia would send house prices skyrocketing, you would have been laughed out of the room.
With interest rates at record lows and the possibility that interest rates will go even lower or even negative, this is where we are.
For the global economy in the broader sense, we will be back in many ways from early to mid-2020. China is suspending traffic between some of its cities, the virus is rampant in much of the world, and uncertainty about the future of the global economy continues to grow.
As far as Australia is concerned, our future with Sydney, Victoria and parts of Queensland in lockdown is also becoming increasingly clouded.
What is clear is that, as with the rest of the pandemic to date, big winners and big losers would arise if a negative cash rate scenario were to become a reality. The only question is who will be the winners and losers?
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator
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