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HomeNewsRBA interest rates: Reality of rate hikes revealed as mortgage holders struggle

RBA interest rates: Reality of rate hikes revealed as mortgage holders struggle

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Soaring interest rates mean one-in-10 variable rate mortgage holders are in stress and Australia risks falling into a recession, but Reserve Bank boss Philip Lowe insists the alternative would be far worse.

The central bank’s governor faced questioning by federal politicians about rising interest rates, inflation and Australia’s cost of living crisis for the second time in a week on Friday.

The RBA has come under fire since lifting the official cash rate — which guides interest rates set by lenders — a record nine consecutive times since May to 3.35 per cent this month.

RBA assistant governor Brad Jones told the same parliamentary hearing there was a big disparity between Australian households in terms of how much they were struggling with interest rates.

Dr Jones said about half of variable-rate owner-occupiers were more than a year ahead on their mortgage payments, and a third more than two years ahead.

But about 10 per cent of variable-rate owner-occupier borrowers had “virtually no spare cash flow” after their mortgage payments and their living costs, he said.

The RBA has followed other central banks around the world in aggressively raising rates in a bid to tame runaway inflation, which reached 7.8 per cent in December in Australia, its highest since 1990.

Dr Lowe conceded on Friday the central bank “did too much” when it dropped the cash rate to a historic low of just 0.10 per cent during the pandemic and had since been forced to “backtrack”.

But the governor and his deputies doubled down as they defended their decision to lift interest rates at such a rapid pace, with Dr Lowe saying tightening monetary policy was the only way to combat “dangerous and corrosive” inflation – even though it was likely to lead to unemployment in the short term.

“History teaches us that once inflation becomes ingrained, the end result is even higher interest rates and greater unemployment to bring inflation back down,” he told the House of Representatives economic committee on Friday.

Treasury is forecasting inflation to have peaked at the end of last year and to slowly moderate until 2025 but the market is still tipping the RBA to lift the cash rate as high as 3.85 per cent before next year.

Dr Lowe said the RBA was navigating a “narrow path” between reining in inflation and falling into recession, but interest rates could start to come down in early 2024 as long as the economy stayed its current course.

“A few things are going to have to go right for that to happen. It’s possible, but there are other scenarios as well,” he said.

Despite the difficult path that lies ahead, and conceding he didn’t know how much higher the RBA board would choose to take interest rates, Dr Lowe told the committee he had no trouble sleeping at night.

Asked near the end of the three-hour hearing what kept him awake at night, the governor did not mention struggling Australian families – despite revealing on multiple occasions this week members of the public had been calling him and writing to him with “disturbing” stories about their financial situation.

Instead, he joked he’d like to be in the media less.

Read related topics:Reserve Bank

Story Credit: news.com.au

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