Overrun hospital system ‘to put brakes on interest rate rise’

Westpac chief economist Bill Evans says rates could stay stuck at 0.1 per cent until at least 2025 if the vaccine rollout is not enough to prevent Australia’s hospital system being overrun.

Westpac chief economist Bill Evans. Picture: Alan Barber

Westpac chief economist Bill Evans says rates could stay stuck at 0.1 per cent until at least 2025 if the vaccine rollout is not fast or ­effective enough to prevent Australia’s hospital system being overrun with Covid patients.

In an interview with The Weekend Australian marking his 30 years in the top economics job at the country’s second largest lender, Mr Evans said the most likely scenario was that the ­Reserve Bank would hike rates in early 2023, but that the pandemic presented a massive challenge to even the most experienced central bank watchers.

“The additional complication (for policymakers) is trying to get the economy back to a sustainable growth level and back to low unemployment, while you are trying to manage volatility around the virus – and that’s why the vaccine is key,” he said.

“I can easily see the scenario where we don’t get up to vaccination levels that are effective, people get sick and hospitals get overloaded.

“That’s a realistic downside scenario to my thinking. In that case, even raising rates by 2024 might be too early.

“The RBA is quite optimistic that won’t happen, but this ­additional dimension of uncertainty (as a result of Covid) is unlike other recovery ­cycles.”

Over the past week Mr Evans released a sharply more pessimistic outlook for the economy.  With “the failure of Victoria’s zero-case policy” – Premier ­Daniel Andrews having recently admitted his state would not be able to ­completely eliminate the Delta variant – national GDP would ­contract by 4 per cent in the September quarter, followed by a “patchy recovery” of 1.6 per cent over the rest of the year, he said.

 But Mr Evans’ central forecast is that a disastrous end to 2021 will pave the way for a powerful ­rebound of 7.6 per cent through next year as vaccination rates reached 90 per cent.

“We are expecting quite strong growth next year, but the uncertainty is much greater, and another dimension is the health risk,” he said.

Mr Evans said Australia’s ­willingness to “use all forms of government policy”, the fact ­employers were beginning to ­require their staff to be inoculated, and the relatively low vaccine hesitancy meant “we have a better chance than other countries” to achieve high vaccination rates.

Even if the RBA did lift rates in early 2023 – RBA governor Philip Lowe remains firm that he does not expect to hike until 2024 – Mr Evans said the “explosion of debt” in Australia over recent decades meant borrowing costs would need to rise by only about one percentage point before households started to feel pressure servicing their massive mortgages.

This hamstrung the RBA’s ability to use monetary policy to tame any potential inflationary outbreak.

“The last time we had a rate hike cycle (begin) was in 2009, and the peak of 4.75 per cent is about equivalent to 1.25 per cent now,” Mr Evans said.

“Central banks need to be very, very careful (or they will) generate the risk of a major ­downturn.”