Westpac’s Bill Evans warns central banks risk raising rates too far

Outgoing Westpac chief economist Bill Evans has underscored the risk of central banks raising interest rates too far in their attempts to beat down inflation, saying 2024 could be a tough year, as he steps down after three decades in the job.

Evans, who will leave the high-profile role to become a senior adviser to the bank, to be replaced by Reserve Bank assistant governor Luci Ellis, also said the post-COVID era had been the toughest period in which to analyse the economy in his career at Westpac.

On Monday, Westpac announced that Ellis had been appointed chief economist, starting in October, and that Evans would remain at the bank as its senior economic adviser.

The move comes after Reserve Bank former deputy governor Guy Debelle left the Reserve Bank in March 2022, and as the central bank faces a series of possible shake-ups in the coming year, including the expected appointment of its next governor this month and the implementation of recommendations from the Treasurer’s review of the central bank.

As Evans exits a post he has held through the dotcom bubble, the GFC and the Russian crisis, he said 2024 would be a very difficult year in a period in which “unprecedented imbalances” had blunted the impact of interest rate rises.

“The risk is that central banks become frustrated with the lack of effectiveness of their policies, due to unprecedented imbalances, and push rates too far,” Evans said. “And then we have a much deeper downturn than is possibly necessary. That’s a risk and I think almost a likelihood. It’s pointing to a very difficult year in 2024 when you get the accumulation of these tightening cycles that can’t be reversed in time.”

COVID aftermath

Evans said the aftermath of COVID was the most difficult period for economists to analyse the economy because of various factors that could be traced back to stimulus measures during the pandemic.

“Close to zero interest rates led to a massive lift in fixed-rate loans, which meant that when the central banks moved, they didn’t have the same pass-through effect they’ve had in previous cycles,” Evans said. “And getting locked up led to this huge lift in household savings, which meant spending held up for longer than expected and asset markets held up as people put their savings to work in new asset markets.”