RBA must think about ‘fairness factor’ in interest rate decision: economists

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Key points

• Economists are split over whether the Reserve Bank will raise its cash rate on Tuesday or give home owners a reprieve.
• Nearly a million fixed-rate mortgage loan terms will end this year, which means some could face a repayment increase of up to 63 per cent.
• The majority of those fixed-rate terms are expected to end across the June and September quarters.

Mortgage holders are being disproportionately punished by repeated interest rate rises, economists warn, and the Reserve Bank needs to consider household stress levels as it weighs up another cash rate increase this week in its bid to contain inflation.

Economists are split over whether the Reserve Bank will raise its cash rate at its July meeting on Tuesday or give home owners a reprieve after lifting it from a record low of 0.1 per cent in April last year to 4.1 per cent last month.

Households with mortgages are disproportionately bearing the brunt of repeated interest rate rises.Credit: Louise Kennerley

CreditorWatch chief economist Anneke Thompson said if the RBA did not raise rates this week, it risked signalling that rate rises were over despite inflation still being too high. But she added there were also risks in lifting rates.

“The flipside risk is if they increase again, that [for] people holding a home loan and particularly those that bought in the last two years, you make things far too difficult for them,” she said.

“We’ve got to think about the fairness factor: is it fair that 30 per cent of the economy are dealt this harsh blow to get inflation down?”

AMP deputy chief economist Diana Mousina said interest rate rises, the RBA’s only tool for slowing consumer spending and reducing inflation, had an unequal impact across households. She said it was worth looking at other ways to take the heat out of the economy.

“Some European countries are looking at … measures implemented by the government that can control inflation because the burden on mortgage holders just seems to be unfair,” she said.

“But also it’s unfortunately just the way that monetary policy works – it targets that one part of the economy.”

A so-called mortgage cliff is also coming: nearly 900,000 fixed-rate mortgage loan terms will end this year and roll onto higher, variable-rate loans.

Recent Canstar analysis found repayments for households coming off fixed-rate terms could be up to 63 per cent higher if they faced the full brunt of the 4 percentage points of rate rises.

Mousina said the majority of those fixed-rate terms were expected to end across the June and September quarters. But even households with variable rate loans were yet to feel the full impact of rate rises to date.

“Expect to see the retail consumer spending data drop off quite significantly in the coming months because there’s obviously a lag impact even if you are on a variable rate, it usually takes about three months for your bank to pass it on to you,” she said. “There’s more pain to come.”

Thompson said retail spending had already begun to drop away.

“We hear from all retailers that discretionary spending basically fell off a cliff in the last couple of months, so it’s a really tough time,” she said.

The Reserve Bank board has been rapidly raising the official cash rate in a bid to tame inflation, which peaked at 7.8 per cent in December. While the latest monthly inflation figures showed signs of more slowing, core inflation remains above 6 per cent – well above the RBA’s target band of 2 to 3 per cent.

Economists warn it is becoming increasingly difficult for the RBA to navigate the narrow path of reducing inflation without driving the economy into recession.

Some expect the bank board to pause interest rate rises this month and lift them again in August, while others believe a rate rise on Tuesday is likely.

Consumer research by AMP Bank found seven in 10 mortgage holders were worried about meeting repayments now and if interest rates continued to rise.

Younger mortgage holders were struggling more, with 80 per cent of 25- to 44-year-olds worried future rate rises would leave them unable to meet repayments.

Nearly a third of mortgage holders were worried about meeting current repayments, and half did not believe they could do any more to cut back spending to meet potential future increases.

Mousina said that was a significant proportion of the population under a lot of stress and it was important for the Reserve Bank to take that into consideration.

“With rate hikes likely to continue for the next one or two months, maybe even three months, then it means that that group of households will be under even more stress,” she said.

“That’s concerning because that could be what tips us over the edge into a downturn or even a recession.”

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