Interest rate rises: RBA risks overshooting itself in the foot

A fourth super-sized interest rate rise this week will hurt millions. Is the RBA giving its previous moves time to work?

The unrelenting pace of Reserve Bank interest rate rises is getting dangerous, and the RBA risks repeating past mistakes and inflicting unnecessary pain on Australians.

Already under fire after previously signalling that its cash rate would not rise until 2024 – and then starting a machinegun spray of monthly increases since May, the RBA appears certain to go again on Tuesday.

A couple of weeks ago it was looking like a 0.25 percentage point rate rise was coming in September, but some strong economic data in recent weeks has financial markets and economists tipping 0.5 percentage points.

This would be the fourth super-sized rate rise since June, pushing the cash rate to 2.35 per cent compared with 0.1 per cent in April, and it’s worrying that many households are unprepared for the imminent pain.

Australia is not alone in experiencing aggressive rate rises, with the US Federal Reserve among several central banks signalling they will do whatever it takes to reverse soaring inflation.

Interest rate rises are hurting housing, but retail sales and unemployment data remains strong.

Interest rate rises are the power tool central banks use to slow inflation by reducing consumer and business spending and demand through increasing borrowing costs.

And the recent rapid-fire rate rises are occurring too quickly to get an accurate picture of their impact on ordinary Australians.

While we’re seeing house prices fall and mortgage lending dive, retail spending rose strongly to a fresh record in July and, unemployment is incredibly low.

A possible explanation for this conflicting data is that many households are ahead on their repayments and built in some financial buffers during the pandemic, while millions of borrowers are on fixed-rate loans and not yet feeling pain.

But they will feel it soon enough, and will join those recent homebuyers with massive mortgages who are watching their home values drop and their repayments soar.

For a typical $500,000 variable rate home loan, a 0.5 percentage point rise on Tuesday would mean their total monthly repayments will have jumped $614 since May, according to RateCity.

And that’s at a cash rate at 2.35 per cent. Financial markets are implying it will be near 4 per cent next year, although economists are generally predicting between 3 and 3.4 per cent. This is well above the 2.6 per cent cash rate peak some were forecasting only weeks ago, so it’s a moving feast of fear.

RateCity research director Sally Tindall says people should do their own number-crunching now rather than wait until the problem hits hard.

“While many households have been able to take these rate hikes in their stride, families should work out what their monthly repayments will rise to if the RBA hikes by another 1.5 to 2 percentage points,” she says.

The Reserve Bank has historical form in rapid rate rises that can backfire. After it slashed its cash rate from 7.25 to 3 per cent during the Global Financial Crisis in 2008 and 2009, it started lifting it again quickly from October 2009.

This attracted criticism, with economists arguing it went too hard too early, and a year later it was cutting rates again.

The size and speed of those moves 13 years ago are less aggressive than this year’s increases, but until inflation behaves itself the RBA will argue it has to go hard.

Sadly, it appears that will be harder than many hoped – especially for the most vulnerable borrowers and first home buyers.

Overshooting on rate rises will result in many unnecessary victims, so hopefully the RBA thinks hard before pulling the trigger.

Originally published as Interest rate rises: RBA risks overshooting itself in the foot