Rhiana Whitson and Gareth Hutchens* discuss how households are dealing with the pressure of successive interest rate hikes as the Reserve Bank lifts rates for the sixth month in a row.
Demand for food relief from Foodbank has increased by 15 per cent since the Reserve Bank of Australia (RBA) started lifting interest rates in May.
“Around half the people coming in haven’t had to access food relief before,” Adam Loftus, Foodbank’s food programs manager, told the ABC.
“It’s coming from across the community spectrum.
“So home-owners, renters, seniors, people on pensions.”
The RBA lifted the cash rate target again this week, for the sixth month in a row, continuing the fastest pace of rate increases since 1994.
However, it surprised economists by opting for a smaller rate rise than expected, lifting the cash rate by 0.25 percentage points, rather than 0.5 percentage points.
In a statement accompanying the smaller rate rise on Tuesday, RBA governor Philip Lowe said he was mindful that interest rates had “increased substantially” in a short amount of time this year.
However, he said, inflation was still too high in Australia and more rate rises would be coming.
Households under increasing pressure
The RBA has now lifted the cash rate target from 0.1 per cent at the start of May to 2.6 per cent in October.
It can take 18 to 24 months for the full impact of rate rises to work their way through the economy, so economists can’t say with certainty what impact these rate rises will finally end up having.
However, the speed of these rate hikes — combined with the high and rising rate of inflation and declining real wages — has been putting some households under severe pressure.
Mr Loftus said demand for food relief from Foodbank had been increasing since May, and anyone who needed help was welcome to receive it from the organisation.
“Our message to home-owners that are out there struggling and not sure what to do next, what bills to pay, whether to put food on the table, is please reach out for help,” he told the ABC.
“There’s so many people in that situation, so many home-owners with every interest rate increase putting more and more pressure on families.”
On Tuesday, economists said the RBA’s decision to lift the cash rate by 25 basis points this month made it an outlier among its peers.
Currently, comparable global central banks are expected to keep delivering larger rate hikes over the coming months.
However, the RBA has broken away from that pack with a surprisingly smaller rate increase.
“The RBA is the first major central bank to scale back the size of its hikes,” ANZ economist David Plank said.
“Market expectations for future interest rate increases have plunged as a consequence of the 25-basis-point decision.
“We still expect the RBA to tighten by 25 basis points in November, taking the cash rate target to 2.85 per cent.
“But there is a bigger question mark over whether the RBA will go again in December as we previously expected.”
Borrowers thinking about the future
As economists reassess their forecasts after the RBA’s surprise October rate decision, home owners paying off mortgages are also reassessing things.
Sonia and Khowaja Aneel decided to borrow big after hearing the RBA governor say rates would be likely to stay low until 2024.
In March, they used the equity in their townhouse to upgrade to a million dollar home.
However, now that property prices are dropping, they’ve decided to rent out their original property instead of selling.
They are now getting advice on how to refinance.
“If the repayments increase, then we have to just increase our income,” Mr Aneel said.
“So, at the moment, we are planning to just cut off our expenses, and then we’ll see how things are.”
“It was not in our wildest imagination that it will go this high.
“And, even still, we are hearing something that they’re going to go even higher,” Ms Aneel added.
“So that is, again, a very disappointing thing – and this would be difficult for everyone’s lifestyle, of course.”
Mortgage broker Robert Mosses is working with a growing number of clients in a similar position to the Aneels.
His advice, for those who can, is to shop around for a cheaper interest rate because being loyal to your lender could cost you more.
“Clients [who] are coming out of their two-year fixed rates — this year or late this year and early next year — could save tens of thousands of dollars by refinancing,” Mr Mosses said.
In July, RBA deputy governor Michelle Bullock said the majority of fixed-rate home loans in Australia were due to expire over the next two years, with the greatest concentration of loans expiring in the second half of 2023.
She said that, when they expired and people rolled onto variable-rate mortgages, the interest rate shock could be noticeable.
“Assuming all fixed-rate loans roll onto variable mortgage rates and new variable rates are broadly informed by current market pricing, estimates suggest that around half of fixed-rate loans would face an increase in repayments of at least 40 per cent,” she said at the time.
On Tuesday, Dr Lowe said the RBA’s rate-hiking plans would be sensitive to how events unfolded in the global economy over the coming months.
He said Australians were still finding jobs, gaining more hours of work and receiving higher wages, and many households had built up large financial buffers.
“[But] one source of uncertainty is the outlook for the global economy, which has deteriorated recently,” he observed.
“Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments.
“Consumer confidence has also fallen and housing prices are declining after the earlier large increases.”
*Rhiana Whitson is a reporter with the ABC’s national business unit in Melbourne. Gareth Hutchens is a business and economics reporter based in Canberra.
This article first appeared at abc.net.au.
