RBA gives warning of further rate hikes to curb inflation

There could be more pain ahead for household budgets, especially those who locked in fixed rates, the RBA has warned, as they prepare for further hikes.

Homeowners who took advantage of record low fixed rates could be slugged with a 40 per cent increase in repayments when they expire.

In her first speech as deputy governor, the RBA’s Michelle Bullock provided an estimate of how many Australians would be hit by rate hikes.

The analysis, based on the assumption interest rates will rise by 3 per cent, revealed just under 30 per cent of owners would struggle to make repayments and could face increases of more than 40 per cent of their current amount.

But those who locked in low rates while they could will face a big jump in payments next year when the majority of terms are estimated to expire.

“Borrowers with fixed-rate loans that are due to expire by the end of 2023 would experience a median increase of around $650 (or 45 per cent) in their monthly repayments,” Ms Bullock said.

“This is slightly more than the rise in payments that variable-rate borrowers would experience over this time.”

But the new RBA governor said half of owner-occupier mortgage owners on a variable contract were two years ahead on repayments, and that “as a whole, households are in a fairly good position” to cope with further rate hikes.

She said high levels of household saving throughout the pandemic, as well as tightened lending standards and the knowledge of the pain to come would also help.

“Much of the debt is held by high-income households that have the ability to service their debt and many borrowers are already making repayments well above what is required,” she said.

“Furthermore, those on very low fixed-rate loans have some time to prepare themselves for higher interest rates.”

Ms Bullock told the Economic Society of Australia that recent borrowers, especially those who took up first homebuyer programs, were the most vulnerable to rate hikes.

“Government policies to improve housing market accessibility … during the pandemic also means that first homebuyers are more highly represented among this group,” she said.

The RBA is expected to lift the official cash rate by half a percentage point when it meets next month.

Much of the risk in the housing market will be influenced by future employment growth, Ms Bullock said.

But the central bank believes households are well equipped to weather the storm after accumulating around $260bn in savings during the pandemic.

Essentially, the RBA will have to watch and wait to see how far it can go to bring the cash rate back to the Goldilocks rate – the sweet spot where the official cash rate is at its neutral level.

“I think what they’ll be worried about is putting too much of a shock through households in a short amount of time and not having enough data to look at how households responded to that shock,” BIS Economics’ head of macroeconomic forecasting, Sean Langcake, said.

“I think we can probably expect to see 50 basis points, at least, in August. The bigger question is how much further they go in the rest of the year.”

But independent economist Stephen Koukoulas said given soaring inflation, the RBA should dish out some “tough medicine” and consider a 75 basis point rise.

“Take the tough medicine early and knock inflation lower as quickly as possible,” he told NCA NewsWire.

Minutes from the central bank’s July board meeting revealed it believed the current rate was “well below the lower range of estimates” on the Goldilocks rate.

“This suggests that further increases in interest rates will be needed to return inflation to the target over time,” it said.

Governor Philip Lowe has previously said he expected inflation to reach 7 per cent this year.

But if those expectations rise higher, so will interest rates.

“If inflation expectations rise, the level of nominal interest rates required to return inflation to the target will be higher than otherwise,” the board said.