RBA’s rate promise gifted borrowers billions of dollars

Thousands of Australian home-loan and business borrowers were gifted as much as $50bn thanks to the RBA’s ‘not before ‘24’ rate hike promise.

There are two ways to look at the Reserve Bank’s ‘not before ’24’ promise and – as I have characterised it - ‘free money’ zero official interest rate through to May 2022.

The first is that it – the ‘promise’ – was stupid or terrible or viciously reckless, or all three, or any other negative adjective you want to apply.

That it sucked people into borrowing excessive sums of money to buy houses they couldn’t really afford – and that they’ve now been stuck with a punishing ‘twofer’.

Massively increased repayments and a property with negative equity.

The second way is that it gifted hundreds of thousands of both home-loan and business borrowers owing around $3 trillion, something like $20bn, maybe as much as $50bn (depending how you do the calculation), as they got to pay very low interest rates on their loans for more than two years

Of course, that money didn’t come from the RBA – or indeed the banks – but from depositors who got screwed with zero rates over that period, and are belatedly making up some ground now.

Now, the RBA only actually cut to 25 points in March 2020.

It went to, effectively, zero – to 0.1 per cent – at its 2020 Cup Day meeting.

Let’s remember what was happening back in March 2020.

The Federal Government was closing down the economy with its national lockdown and total border closure. Even with JobKeeper pouring tens of billions of dollars into people’s pockets; even with the RBA’s rate cuts; the economy had its biggest-ever – greater than anything seen even in the Great Depression of the 1930s – plunge in the June 2020 quarter.

Governor Lowe and RBA management, backed by the RBA board, felt it was absolutely critical to give all borrowers - both home loan and business – confidence that their rates wouldn’t go up, that their cash flows wouldn’t be slashed, until we got well through it all.

They very specifically tied any rate rises to rising inflation, which in turn was tied to wage rises.

RBA Governor Philip Lowe appearing before at Senate Estimates hearing in Parliament House, Canberra on Monday. Picture: NCA NewsWire / Gary Ramage

They got ambushed when the inflation came this year even before the wage rises.

They fixed on a three-year time horizon – early 2024 and so the ‘not before ‘24’ effective promise – to underwrite, again, both consumer and business confidence.

So, who exactly are supposed to be the victims out of all this?

Setting aside depositors, who did get screwed by the decisions to go down to 0.1 per cent; but would hardly be complaining that the RBA has now ‘broken’’ its promise not to hike?

The vast majority of home loan and business borrowers saved collectively billions.

If they borrowed more, so what?

They got that extra money cheap; and the canny ones locked in those low rates for three and five years.

The only ‘losers’ – and even that’s highly debatable – are the relatively tiny number of, and I stress, first home buyers, who now face substantially higher mortgage payments.

But really: were they to be given free money for life? In any reasonable universe, they had to expect rates to start going up, and significantly, if delayed at best until early 2024.

Would it really have been dramatically different if Lowe had held off raising until February 2024 – and then lifted the official rate by, say, 400 points, in one hit, to catch up? But ‘keeping his promise’?

But even so, very few of those first home buyers – second home buyers were in low-rate, low repayments and high selling prices, heaven – have actually been losers in any real sense.

Most got to buy houses they could not otherwise have got into – and at 2020 prices, lower than prices have fallen to even now.

If they borrowed for three years or longer fixed, they won’t actually face higher rates and higher repayments, until Lowe’s promised 2024.