Interest rates could still go up again, Australia’s new Reserve Bank (RBA) boss has warned, in her first public speech as governor.
“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” she said, hinting that inflation is likely to be too high for too long.
“There are risks that could see inflation return to target more slowly than currently forecast.”
The RBA has already lifted interest rates from 0.1 per cent to 4.1 per cent in the sharpest rate-hike cycle in history. That has caused an enormous increase in mortgage repayments. Standard Variable interest rates have risen from 2.4 per cent to 6 per cent in that same time, lifting the weekly repayment on a $700,000 variable mortgage from $718 to $1,042. (The average new home loan size in NSW for owner occupiers is $722,000, in Tasmania the average is $464,000).
Also by Jason Murphy:
People without a mortgage are getting ahead. But those with a mortgage have gone backwards since 2021, as the next chart shows.
Many Aussie households locked in their mortgage interest rate for several years at a low rate, and most of those are now reverting back to the current interest rate, delivering a financial blow. This comes as prices are rising for food, fuel, and it seems like everything else.
Still, Aussie households are not, in the main, struggling too badly. Almost everyone is still diligently paying off their mortgage. The rate of arrears remains very low by historical standards. Which is a bit of a puzzle. How are we coping so well?
Wealth for toil, money for nothing
Australians are working hard and getting paid for it. Australia’s wages are up and our hours worked are up, and the combination means household income is far higher than it was pre-pandemic.
You might have heard wages aren’t keeping up with inflation - and that’s true - but the way the Bureau of Statistics measures them doesn’t include overtime or bonuses.
There’s a lot of overtime being done right now. Hours worked per person are up sharply compared to pre-pandemic, and fewer people are saying they can’t get the hours they want. Our labour market is tight enough right now that some companies are even offering sign-on bonuses: cash paid to people for agreeing to work there.
All this means that Australia’s incomes are rising faster than inflation, for workers, as the next chart shows. It’s a big advertisement for how good it is to have a tight labour market with low unemployment.
The tight labour market is something we don’t want to lose. Which is why the RBA governor’s comments on full employment were the other major interesting thing in her speech. She pledged to keep the Australian economy at full employment and to make doing so a more explicit part of the RBA framework.
“Being employed not only supports people financially, but also provides them with a sense of purpose. It helps to foster mental and physical well-being,” Bullock said.
Of course, full employment doesn’t have to mean literally zero unemployment, at least not to the RBA. They define it as the rate of unemployment that doesn’t lead to accelerating inflation.
“It would be unwise to specify a fixed numerical target for full employment. For one, full employment can change over time, as the structure of our economy evolves,” Bullock said.
The other big cushion we have that explains why the economy hasn’t exploded is the cash handed out by the government during the pandemic. Aussies are sitting on huge sums.
One glance at the chart of household deposits is enough to illustrate our impressive liquidity situation. As of 2020, we now have more than a trillion in the bank, and rising.
Another way to see it is to look at how much Aussies are putting into super. We just hit a record of $50 billion in the last three-month period.
The higher superannuation guarantee is part of this, but the rise probably also reflects people moving cash from outside super into super.
This level of financial comfort is why the RBA can afford to lift rates if it chooses. The number in today’s consumer price index will be vital in determining whether the new RBA boss hikes rates at the next board meeting - Melbourne Cup Day.
Mortgage holders are right to be worried.