One in 20 borrowers cannot cover ‘essential expense’, RBA’s Bullock reveals

In her first prepared address as RBA governor, Michele Bullock has revealed the extreme pressure faced by some Aussie homeowners, but warns it won’t stop the board raising rates if necessary.

Low income households and renters are better off than they were two years ago despite soaring interest rates and high inflation, as strong income growth has safeguarded people from the cost of living crunch, Reserve Bank governor Michele Bullock has revealed.

In her first prepared remarks as RBA governor, Michele Bullock warned the central bank “will not hesitate” to hike rates again if inflation proves more stubborn than expected.

But Ms Bullock also detailed the painful squeeze faced most acutely by highly indebted household borrowers who have seen the cost of repayments surge as the RBA delivered its punishing round of rate rises.

“For [indebted] households, higher interest costs have reduced their cash flow by more than the rise in inflation has,” Ms Bullock said in a speech to a Commonwealth Bank conference on Tuesday evening.

Renters and outright homeowners have, on average, seen their cash flows grow. Picture: NCA NewsWire / Max Mason-Hubers

Ms Bullock said the effects of high borrowing costs and persistent price pressures were not being felt uniformly across the economy.

Renters have, on average, seen their funds increase between December 2021 and June 2023 as high inflation and rising rents were outstripped by a jump in incomes. This is due to more renters finding work as the jobless rate sits at near record lows.

Similarly, households that were not saddled with mortgage repayments had seen cash savings rise since December 2021.

5 per cent of borrowers unable to pay for “essential expenses”

One in 20 households with a variable rate mortgage had been left unable to cover their cost of “essential expenses”, Ms Bullock revealed, citing recent analysis from the central bank.

Governor Michele Bullock cautioned that highly indebted household borrowers were finding it most challenging. Picture: NCA NewsWire / Dylan Coker

For households with loans amounting to four times their income, one in four are unable to cover their costs.

“These borrowers may be finding ways to make ends meet, but this can involve some difficult financial decisions,” Ms Bullock added.

Governor Bullock stated that these households were drawing on savings, working extra hours, or forgoing expenses that would be normally considered essential.

“At the extreme, it could involve negotiating a hardship program with their lender or selling their property,” she said.

Bullock issues rate hike warning

Amid fears that an escalation of conflict between Hamas and Israel could keep oil prices and consequently inflation higher for longer, Ms Bullock said the central bank would hike rates if inflation proved stubbornly persistent.

The RBA board is scheduled to make its next cash rate decision on November 7. Picture: NCA NewsWire / Christian Gilles

“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” she noted.

Fresh inflation data for the September quarter, to be released on Wednesday, will be closely watched by economists and investors. A result above market expectations of a 1.1 per cent increase adds to the cash for a further monetary tightening.

Markets now ascribe a 40 per cent chance that the RBA will raise rates when it meets for its November Melbourne Cup Day meeting.

However, Ms Bullock noted the RBA was mindful of the effects of its aggressive round of monetary tightening, which typically take 12 to 18 months to flow through the economy.

“The board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy,” she said.

Originally published as One in 20 borrowers cannot cover ‘essential expense’, RBA’s Bullock reveals