The Lesson From Persistent Growth in ‘Rate-Sensitive’ Australia

Are rate cuts finally set to arrive in Australia? According to the common interpretation of the Reserve Bank of Australia’s (RBA) early December meeting minutes, the answer is yes. While RBA Governor Michele Bullock didn’t, of course, explicitly say as much—nor did any of the other participants—many pundits read into commentary involving the trend of inflation proceeding back to target as expected. They see this as a sign long-awaited cuts the bank has seemingly flip-flopped on several times loom in 2025.

Our question: What evidence suggests the Lucky Country’s stocks need cuts? And in that is a broader lesson: Don’t overrate monetary policy.

Many economists, including the RBA’s, argue Australia is among the developed world’s most rate-sensitive nations. On the demand side, the evidence is rather compelling. According to the RBA’s February 2023 Statement on Monetary Policy, Australia trailed only Norway in the share of variable-rate mortgages, with nearly 70% of outstanding home loans carrying floating interest rates.^[i] Canada is next highest at around 35%, followed by the UK at roughly 15% and the US around a measly 5%.

This, of course, hits when rates and inflation rise—as they did over the past few years. In April 2022, when tightening had yet to begin, outstanding Australian mortgages carried an average 2.9% interest rate. Today it is north of 6%.^[ii] (Is “higher than” “north of” Down Under?) With the majority of households paying variable rates, this transmits a higher rates’ punch on household finances quite rapidly. Far faster, say, than in America, where the preponderance of 30-year fixed home loans means rising rates don’t affect existing homeowners with a mortgage at all—an issue that may have chilled existing home sales and cut inventory, but also limits financial pressure on them.^[iii]

We are sure many Aussie households are feeling financial pressure from this direct hit. Many pundits hyped exactly this during the tightening cycle as reason to expect a particularly “hard landing” (read: sharp recession) in the country.

But as in America, that didn’t happen. Earlier this month, the Australian Bureau of Statistics reported Q3 GDP grew 0.3% q/q, extending a string of positive growth that dates to Q4 2021.^[iv] Note: That was before any rate hikes. There have been zero quarterly contractions despite this fast rise in interest rates. Zero!

Now, the pace of growth may not be fast. That 0.3% q/q figure translates to 1.3% annualized, which is slower than US growth.^[v] And, yes, some economists and pundits hype the fact GDP has contracted on a per-capita basis recently. But when expectations call for a particularly nasty recession and you get aggregate growth—and have to dig for signs of contraction—that is a positive surprise. Hence, Australia’s ASX 200 Index hit its low on June 20, 2022 after just two hikes. It climbed through 11 more, presently sitting up 41.2% since that June low.^[vi]

And the ASX has kept climbing in 2024 … despite zero cuts that Western pundits somehow managed to convince themselves markets in America, Canada and elsewhere desperately needed.

Maybe the RBA’s cuts are coming soon in 2025, as pundits now think. Bullock could point to monthly inflation running at 2.1% y/y in September and October—a hair’s breadth above the 2% target for headline consumer price index inflation. Or they could stay on hold. Or shock and hike! Central banks are unpredictable.

But if a highly rate-sensitive economy like Australia has growth through hikes while stocks climbed, it should be a clear sign to the world: Assuming central banks dictate cyclical conditions is a faulty premise.