Internal modelling at the RBA, headed by Phil Lowe, lends further weight to the idea that interest rates could continue to climb.The latter has superseded the supply-side goods inflation that precipitated this shock as a result of the closing of the global economy and its supply chains during the pandemic.
In March, it quantified three potential scenarios. The first involved keeping the cash rate constant. The two other paths entailed lifting its rate to 4.8 per cent, or 100 basis points above the neutral rate, at a steady or faster pace. In these more aggressive moves, core inflation only reverted to the mid-point of the RBA’s 2-3 per cent band in June 2025. Keeping the cash rate steady achieved the same result by mid-2026.
The insights are clear: non-bank lenders originate loans with much higher default rates and hence risk of loss. Across all RMBS issues, the 30 days or more arrears rate for non-bank lenders is more than four times higher than equivalent bank non-repayment rates. Our research demonstrated that raw or naive RMBS arrears indices are indeed enormously biased unless you control for these factors using a “hedonic”, regression-based approach that is similar to the compositional adjustment methodologies we developed for CoreLogic’s house price indices and those used by global statistical agencies for accurately measuring inflation. The RBA has since leveraged off our research in its own RMBS studies.
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