Interest rates are expected to continue rising, but there is a worrying sign that they will not be enough to save the Australian economy.
When it comes to the world of economics and finance, the divergence between different short-term predictions for various data points is generally relatively small, right down to the pandemic.
Since then, almost all forecasters in the sun have ended up with an egg in their face at one time or another, as the impact of the pandemic and the second- and third-order effects that followed greatly complicated things. .
The trajectory of Australian interest rates has not been different, with few analysts seeing a rise in the cash rate in early May last year. There is also a wide divergence of views on where the maximum cash rate will be for this cycle, with a considerable gap between the Commonwealth Bank’s 1.6 per cent peak forecast and the 3 percent. percent + ANZ.
Undoubtedly, the key point on which the different forecasts differ is the impact that the increase in rates will have on the economy and the housing market and, by extension, the rate of inflation.
Much of this impact will be defined by household confidence levels and their willingness to continue spending despite rising rates. But this is something that is quite difficult to quantify accurately, especially now.
But if we focus on what we know in terms of how the rate hike will directly affect household budgets, a more complex picture emerges than might be initially expected.
Many borrowers are immune to moderate rate hikes
According to Reserve Bank figures, more than 40 percent of variable-rate borrowers would not see any increase in their mortgage payments if the RBA’s cash rate rises to 2.1 percent.
The reason these borrowers will not face an increase in their mortgage payments is that they are already paying more than they would if the cash rate were to rise to 2.1 percent.
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This can happen for a number of reasons. But perhaps most notable is that many of these mortgages were written years ago at significantly higher interest rates and these households have opted to keep the repayment rate higher than necessary instead of reducing it to a rate. lower.
About one in four mortgage holders fall into this particular category.
This significantly complicates matters for the RBA. These households have no reason to reduce their spending just because of the impact of a moderate rise in interest rates, so they do not put any downward pressure on inflation.
Fixed rates buy time from borrowers
In years and decades, Australian mortgages have traditionally focused on variable rate loans. The RBA’s Term Funding Facility (TFF), which pledged to provide up to $ 200 billion to banks with only a 0.1% interest rate, changed all that.
By providing banks with extremely cheap money, the RBA made it easier to take out one- to three-year fixed-rate mortgages at rates below 2 percent. These low fixed rates and the promise of staying low until 2024 attracted both buyers and refinancers, as the rate on Australian mortgages fell to historic lows.
As a result, the proportion of total fixed-rate mortgages skyrocketed. In April, about 40 percent of mortgages are currently at fixed rates.
According to data from the National Australia Bank (NAB), according to its loan book, only 27% of fixed rate loans as a proportion of outstanding dollars expire before April 2023.
If we were to assume that there is a broadly similar trend present in fixed rate mortgages in general and we conservatively overlay the impact of 73 percent of fixed rate borrowers who are immune to rate hikes before the April 2023, this leaves about 29 percent of the total. borrowers who do not face a rate hike.
A complex image for the RBA
With rough estimates showing that more than half of mortgage holders are not facing an increase in mortgage repayments from a cash rate of 2.1 percent before April 2023, the job of the RBA is becoming much more complex than before.
If the primary consideration for a home is the mortgage repayments it faces and not the impact on broader confidence or home prices, many mortgage holders may continue to spend at pre-mortgage levels. rising rates, with no impact on reducing inflation.
So what does the RBA do at the end of the year if inflation is not addressed enough with any rate hike it has deemed necessary so far?
In short, they would consider raising rates even further in order to push down inflation.
Ultimately, the direction of interest rates will depend on a myriad of factors arising from both national and international considerations. It is entirely possible that the Commonwealth Bank’s estimate is correct and that inflation may fall due to the inability of the economy to cope with much higher rates.
On the other hand, global inflationary pressures stemming from the war in Ukraine and confinements in China could be combined with the silenced direct impact of rate hikes on family budgets, forcing the RBA to adopt a cycle of significantly more aggressive rate hike than currently expected.
Tarric Brooker is a freelance journalist and social commentator. | @AvidCommentator
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