Markets don’t understand interest rate pressures hitting Australians

It’s been a long time since Australia experienced anything like this. Poverty is coming to the employed. Picture: IStock

Markets do not appreciate the turmoil that is taking place among the 15 or so per cent of employed Australians who are now on the brink of financial desperation. They have suddenly moved from last year’s state of wellbeing to one where they simply can’t make ends meet on their current income.

Yesterday as the Reserve Bank Governor was speaking to parliament and Commonwealth Bank chief executive Matt Comyn was warning that households were under strain, I was yarning with a small business operator in an outer Melbourne suburb. He graphically described what was happening to the lives of many in his customer base.

Commonwealth Bank CEO Matt Comyn at the bank's half year results. Picture: Supplied

Income is still coming but it is not enough to pay the bills. There is a deep seated anger that this suffering is being imposed on them by people who don’t know what they are doing. The seeds of civil disobedience are being sown as some people chose which bills to stop paying.

Some chose rent in the belief that it will be very difficult to evict them under the Victorian (and Queensland) tenancy laws. Some heavily borrowed homeowners have stopped paying rates to councils and even some utilities.

The mortgages continue to be paid but my small business person hears unconfirmed stories of banks realising they may not be able to evict, so they are offering payment reductions and deferrals.

It’s tiny at the moment but get ready for a lot more payment deferrals, particularly as we hit the middle of the year and the situation gets worse.

There is a growing feeling of helplessness among these Australians because they can’t understand why this person called Philip Lowe is being allowed by the government to keep hitting them with interest rate rises when he promised he wouldn’t do that. When I tried to explain there was a blank stare from the small business person — it said that I did not understand the real world.

In nominal terms Australia is highly unlikely to have a recession because of the mining and agricultural boom but in parts of our major cities there will be a very deep recession. The economic fallout will be cushioned by the affluent 15 to 20 per cent of the population and the fact that the remaining 60 per cent or so are making ends meet, just. My small business operator is among the 60 per cent but fears that if his customer base keeps shrinking and interest rates keep rising he will be forced into the ranks of those at the bottom the pile who can’t make ends meet.

It’s been a long time since Australia experienced anything like this. Poverty is coming to the employed. Employment Minister Tony Burke’s wage rise advocacy is music. If the interest rate hikes are a relatively short-term phenomenon then the society will get through. But if inflation takes longer to reduce than expected — and interest rates have to go higher for longer periods — then social upheaval and civil disobedience will rise.

Employment minister Tony Burke’s wage rise advocacy is music. Picture: NCA NewsWire / Gary Ramage

And if the inflation battle is a longer term affair then banks will simply not be able to enforce their mortgages because of the community rage which will be fanned by TV and social media.

We have to hope that wages are not embedded in the inflation rate, which would force rates much higher. An even more horrific possibility is that US inflation will not come down in the next six months, forcing the US Federal Reserve to lift interest rates substantially — probably around the December quarter

If that happens we will have to follow or our dollar will be trashed by shorters who will see a great opportunity to take advantage of our mess. That will explode inflation. Those borrowing overseas, led by banks, would have to pay much higher amounts.

If we were forced to match US rates after a year of great difficulty the ramifications would be very severe indeed.

We hope this is a relatively short-run exercise but if it’s not we must be aware of what is likely to happen. I don’t think our markets fully appreciate the dangers in the simmering community cauldrons.