Higher interest rates are a certainty for Australian homeowners but economists say most will be able to weather the rise, but some parts of the economy including hospitality and the arts could struggle just as those industries begin to recover from the pandemic.
Despite holding the official interest rate at 0.1 per cent in Tuesday’s meeting, the Reserve Bank board signalled it could raise the cash rate as soon as June, after the May federal election, as inflation pressures grow and wage growth strengthens.
People who bought recently will be hit hardest by rate hikes, economists said.Credit:Flavio Brancaleone
Recently appointed RBA deputy governor Michelle Bullock said the bank was starting to see underlying pressures in the economy that pointed to sustained inflation, including consumers looking for wage rises and businesses responding to those asks.
“These are the things that would suggest there’s some underlying inflation pressure in the economy and it isn’t just purely a level shift in prices,” she told a senate estimates committee on Wednesday evening.
RBA governor Philip Lowe said on Tuesday the bank wanted to see the latest data on inflation and wage growth, due out at the end of April and mid-May respectively, before moving the cash rate.
Grattan Institute economist Brendan Coates said people who bought recently will be hit hardest by interest rate rises.
“Higher interest rates are coming: the only question is just how big the rate rises are and how quickly they occur,” he said. “People should prepare for that and be ready for the fact that it’s probably going to come quickly.”
It’s been more than 12 years since the RBA began an interest rate tightening cycle, and this time every move will be felt by homeowners, Mr Coates said.
In October 2009, when the RBA raised the cash rate from 3 to 3.25 per cent, average owner-occupier mortgages were $359,000 in Sydney and $315,000 in Melbourne, according to data from the Australian Bureau of Statistics.
Since then, household debt has ballooned. In February the average loan for owner-occupiers was $760,000 in NSW, $624,500 in Victoria, and $524,000 in Queensland.
“Rate rises that take us from 0.1 per cent up to say 1.5 to 2 per cent, over the course of the next two years will be a big impact on a lot of people’s household budgets,” Mr Coates said.
Barrenjoey chief economist Jo Masters said the level of household debt was not necessarily the most important factor, it was more about people’s ability to service it, and lenders are required to stress test people’s ability to repay with higher interest rates.
But while there were those safeguards in the system, Ms Masters said there was still uncertainty around how people would react.
“Households are not just facing higher interest rates, but they’re also facing a rapid acceleration of inflation, particularly for essential goods and services,” she said.
“So if I’m a household that doesn’t have excess savings – I live dollar to dollar, month to month – I’m now staring down the barrel of increased prices at the supermarket.”
Ms Masters expects the cash rate to reach 1 per cent by December and said the RBA will be closely watching how households respond. She said one risk of higher interest rates is that people stop spending on parts of the economy that were just starting to recover from the pandemic.
“Eating out at restaurants going to the cinema, going to a band, those have just been recovering as we’ve been able to get out and spend on them,” she said.
“If you start to see the consumer pare back on discretionary spending it makes that recovery harder for the services side of the economy.”
Australians are sticklers for paying their mortgages, Mr Coates said, adding that history showed people tend to hold on to their property for as long as they can even with an increase in financial stress. What happens instead is people will spend less on other things, including dining out or buying new clothes.
“That is exactly the point of higher interest rates and taking demand out of the economy,” he said.
Jacqueline Maley cuts through the noise of the federal election campaign with news, views and expert analysis. Sign up to our Australia Votes 2022 newsletter here.
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