Mortgage burden set to hit 12-year high: RBA

Despite the growing burden on mortgaged homeowners, the RBA minutes noted that the board still ‘expects to increase interest rates further over the period ahead’.

This year’s rate rises will push households’ mortgage repayments as a share of income to the highest level in 12 years, minutes from the Reserve Bank’s Melbourne Cup day board meeting have revealed.

Despite the growing burden on mortgaged homeowners, the minutes noted that the RBA board still “expects to increase interest rates further over the period ahead”.

With the future clouded in an unusual level of uncertainty, the board “did not rule out returning to larger increases if the situation warranted”.

“Conversely, the board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook,” the minutes said.

“Interest rates are not on a preset path.”

The RBA board, led by governor Philip Lowe, placed great weight on the delayed impact of rate rises, noting that as a result of this year’s rate hikes, “scheduled housing mortgage payments as a share of household income were expected to increase to levels not seen since around 2010”.

“As a result of the increase in home loan interest rates that had already occurred over the year, housing mortgage payments were set to rise further in the period ahead. This included the effect of fixed interest rate loans rolling off over time,” the minutes said.

The RBA lifted its key cash rate target from 2.6 per cent to 2.85 per cent on November 1, with board members considering the case for a second straight 0.25 percentage point increase, versus a larger 0.5ppt move.

“The arguments for a 25 basis point increase rested largely on the fact that the cash rate had been increased materially in a short period of time and that there were lags in the operation of policy,” the minutes noted.

The minutes noted that the “board agreed on the importance of returning inflation to target and expects to increase interest rates further over the period ahead in its effort to establish a more sustainable balance of demand and supply in the Australian economy”.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

RBA board members (top left to bottom right) Philip Lowe, Michele Bullock, Steven Kennedy, Ian Harper, Carol Schwartz, Carolyn Hewson, Mark Barnaba, Wendy Craik and Alison Watkins.

Analysts have expected a further rate rise to 3.1 per cent next month, and following the January summer break, have pencilled in two or three more hikes by mid-2023.

In deciding to deliver a 0.25ppt rate rise this month, board members also factored in the potential shock of re-accelerating the pace of rate rises so soon after having slowed (the RBA hiked rates by 0.5ppts for four straight meetings between June and September).

“The board agreed that acting consistently would support confidence in the monetary policy framework among financial market participants and the community more broadly.”

In choosing to deliver the smaller move, the board also considered that the 32-year-high inflation reading of 7.3 per cent over the year to September had been only “a little above” the bank’s own forecasts.