RBA ‘will not hesitate’ to hike rates despite heavy burden on big borrowers, says Michele Bullock
The warning comes despite RBA governor Michele Bullock’s revelation that as many as one in two borrowers who maxed out their home loans don’t have enough income to meet everyday expenses.
Reserve Bank governor Michele Bullock says she “will not hesitate” to hike rates again if there are signs the nation is losing the battle to tame inflation, despite revealing that as many as one in two borrowers who maxed out their home loans do not have enough income to meet everyday expenses.
Economists are warning that Wednesday morning’s consumer price report could pave the way for a 13th rate rise on Melbourne Cup day, and with eight in 10 voters saying cost of living issues are top of mind, Jim Chalmers said “we know that challenges coming at us from around the world will be felt most around the kitchen table”.
Writing in The Australian, the Treasurer said that “today’s consumer price index figures will be another reminder of the unpredictability of the global economic environment, and the persistence of our inflation challenge”.
“With global uncertainty from the slowdown in the Chinese economy, the war in Ukraine, conflict in the Middle East and the risk of higher fuel prices from global market dynamics, the next 12 months will bring challenges,” Dr Chalmers said.
“Inflation will remain higher than we’d like for longer than we’d like, both globally and here at home, and there will be some volatility in the months and quarters ahead,” he said.
“But thanks to the foundations we’ve laid in the last 12 months, we face the next 12 months from a position of relative strength with record jobs growth for a new government, historically low unemployment and with bigger buffers in the budget.”
For a family with a $750,000 mortgage, another rate rise would mean they could be paying $1800 more a month on interest repayments than before the RBA began hiking in May last year, or nearly $22,000 a year.
Ms Bullock said previous research showed that 5 per cent of all households with variable rate mortgages were spending more on the bare essentials and loan repayments than they were receiving in income.
“But this rises to about 25 per cent for highly leveraged borrowers – those with loans amounting to at least four times their income,” Ms Bullock said in a speech on Tuesday evening at an event organised by CBA, the country’s biggest retail bank.
But for this “small group of highly leveraged borrowers … using a broader measure of essential expenses, these figures rise to about 15 per cent for all borrowers and about 50 per cent for highly leveraged borrowers,” her speech noted.
With financial markets pricing in about a 40 per cent chance the central bank board would lift the cash rate by a quarter of a percentage point to 4.35 per cent, Ms Bullock said the RBA board’s focus “remains on bringing inflation back to target within a reasonable time frame, while keeping employment growing”.
“It is possible that this can be done with the cash rate at its current level but there are risks that could see inflation return to target more slowly than currently forecast,” she said.
As mortgaged homeowners join the nation’s retailers in hoping and praying another hike will not prove necessary before Christmas, Ms Bullock said “the board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”.
“At the same time, 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.
Australian Bureau of Statistics figures on Wednesday morning are expected to show consumer price growth slowing from 6 per cent in the June quarter to 5.3 per cent in September, according to the consensus forecast among economists, still well above the RBA’s 2-3 per cent target range, but well down from the peak of 7.8 per cent in December.
This welcome trend, however, will conceal a worrisome acceleration in inflation over the three months to September to 1.1 per cent, from 0.8 per cent in the previous quarter. The reversal will be thanks in large part to a surge in petrol costs off the back of a steep rise in global oil prices, but also as price growth for services such as hairdressing and eating out prove “stickier” than anticipated, analysts say.
Ms Bullock in her speech said RBA analysis also found that mortgaged households had suffered a “significant decline in spare cash flows, unlike other households”.
“By contrast, the spare cash flow of renters has, on average, risen a little as high inflation and rising rents have been more than offset by growth in income. There will, of course, be diverse outcomes for individuals within these groups,” she said.
A new survey by polling firm JWS Research found that eight in 10 adults chose cost of living in their top five issues. Unprompted, 56 per cent said it was among their top three issues, up from 43 per cent in June.
The True Issue survey reported that “there is a sense that cost of living is now a challenge for ‘most’ households, impacting not just low-income earners but also Middle Australia,” and there was a “frustration at increases in essential expenses outstripping rises in their income, limiting their ability to maintain their standard of living and to save for their future”.
The Albanese government in last month’s employment white paper committed to working towards full employment, defined as “everyone who wants a job is able to find one without having to search for too long”.
After the RBA review recommended that the central bank’s dual mandate should emphasise the goal of full employment, some have expressed concern that Labor’s ambitious definition could complicate the RBA’s other goal of low and stable inflation.
As Dr Chalmers finalises a new set of ground rules with the central bank’s board on how monetary policy is conducted, Ms Bullock said “while inflation, appropriately, has a numerical target, it would be unwise to specify a fixed numerical target for full employment”, which tends to shift over time under different economic conditions.
“Much has been written over the past month on whether full employment means different things to the Reserve Bank and the government. The answer is no – our objectives are complementary. But we typically have different time horizons to work with,” she said.
“The focus of monetary policy is the short to medium term – a period of between a few quarters and a few years.
“But governments rightly have a longer horizon when thinking about full employment. And over a longer horizon, the level of employment that can be sustainably achieved while keeping inflation consistent with the target can be influenced by various forces, including government policies.”
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