Inflation spike a sharp reminder of dangers of more interest rate rises

Surprise inflation numbers threaten a scary, painful sequel for borrowers already bitten by 13 RBA rate rises in two years.

Anyone battling a big mortgage should be afraid right now.

Just when you thought it was safe to say Reserve Bank interest rate rises were over, along come new Consumer Price Index figures showing 4 per cent annual inflation growth.

The monthly CPI figure has climbed every month since March, completely the wrong direction for anyone hoping for mortgage repayment relief.

And things could get worse, with the federal government about to pour billions of extra dollars into consumers’ pockets from next week through tax cuts and other incentives, potentially pouring petrol on these already-high inflation figures.

So why is this happening, and what does it mean for borrowers?

The Reserve Bank wants inflation to sit between 2 and 3 per cent and has one key tool to achieve it: interest rate rises that are designed to slow consumer spending and therefore inflation, while rate cuts are used to speed things up when needed.

Sadly this RBA tool often resembles a sledgehammer, and since May 2022 rate rises have added 62 per cent to repayment costs on variable-rate home loans.

But the sledgehammer is only hitting a minority of Aussies hard: those with big mortgages and businesses who borrow money.

RBA governor Michele Bullock and her board are under more pressure to raise interest rates. Picture: NewsWire/Nikki Short

Australia’s housing market is roughly split into one-third renters, one-third owners without mortgages, and one third borrowers still repaying their home loans.

Of that borrowing group, many have had a home loan for years, so their outstanding debt is relatively small and often manageable.

That leaves only about 10-15 per cent of the population bearing the brunt of the RBA rate rises. They are often younger adults and recent home buyers who have bought in recent years when home values are sky-high and mortgage sizes the same.

Not too long ago Australia’s average mortgage size was around $300,000 and today it’s above $600,000. Another rate increase will add $100 more a month to the cost of an average mortgage, and that’s on top of the extra $1560 per month households are already paying from recent rises.

The stage three tax cuts from July 1 will deliver average income earners an extra $177 a month, and for many that money will be used to cover higher living costs and mortgage interest rates.

However, others will have that extra cash to spend however they wish, and that’s why it’s a worry that more cash in the economy will keep inflationary pressures high and potentially prompt more RBA rate rises.

Economists say Wednesday’s new CPI numbers have pushed up the risk of a rate rise in August towards 50-50.

While inflation is well below the 8.4 per cent it touched in late 2022, it remains too high for the RBA and was driven up by sharp rises in rents, electricity, petrol and insurance.

BetaShares chief economist David Bassanese said the inflation release was a “shocker, and places huge pressure on the Reserve Bank to raise interest rates in August”.

However, KPMG chief economist Brendan Rynne said the RBA was unlikely to lift rates again, and likely to wait until February 2025 before cutting.

Nervous borrowers can only wait, worry and be prepared for another rise.

Originally published as Inflation spike a sharp reminder of dangers of more interest rate rises