RBA must think about ‘fairness factor’ in interest rate decision: economists
Economists are cautioning that homeowners with mortgages are facing an unfair burden due to frequent increases in interest rates. They argue that the Reserve Bank should take into account the stress levels of households while considering whether to implement another cash rate hike in order to control inflation.
There is a division among economists regarding the possibility of the Reserve Bank increasing its cash rate during the upcoming July meeting, or providing relief to homeowners instead. This comes after the cash rate was raised from its historically low level of 0.1 per cent in April 2020 to 4.1 per cent last month.
Families who have home loans are experiencing a larger impact from the frequent increases in interest rates.
According to Anneke Thompson, the chief economist at CreditorWatch, if the RBA chooses not to increase rates this week, it could potentially indicate that they no longer plan to raise rates, even though inflation still remains too high. However, Thompson also mentioned that there are potential dangers in raising rates as well.
"The opposite side of the coin is that if they rise once more, it could pose significant challenges for individuals with a mortgage, especially those who made their home purchase within the past couple of years," she commented.
We need to consider the element of equity: is it justifiable that such a significant portion (30 percent) of the economy is subjected to this severe impact in order to decrease inflation?
Diana Mousina, the deputy chief economist at AMP, expressed that the increase in interest rates, which is the Reserve Bank of Australia's solitary method for curbing consumer expenditure and mitigating inflation, doesn't uniformly affect all households. She suggested exploring alternate approaches to cool down the economy.
"She mentioned that certain European nations are examining ... governmental actions put in place to manage inflation as they find the current impact on individuals with mortgages to be unjust."
"However, it is regretfully the nature of monetary policy to solely focus on that specific aspect of the economy as well."
An impending mortgage crisis is on the horizon: almost 900,000 fixed-rate mortgage agreements are set to expire this year and transition to pricier variable-rate loans.
A recent study conducted by Canstar revealed that households who are concluding their fixed-rate terms may encounter a significant increase in their repayments. This increase could reach a staggering 63 percent if they were to experience the full impact of the 4 percentage points of rate hikes.
Mousina mentioned that most of the predetermined time periods with a constant interest rate were anticipated to conclude in the second and third quarter of the year. Despite this, even individuals who have flexible interest rate loans have not completely experienced the effects of the past rate increases.
Anticipate a substantial decline in the retail consumer spending figures in the upcoming months as there will inevitably be a delay in its impact. Even if you have a variable rate, it commonly takes around three months for your bank to transmit it to you. Brace yourself for more difficulties ahead.
There are individuals who anticipate a halt in the increase of interest rates by the bank board this month, with a subsequent resumption in August. On the contrary, some people think it is probable that there will be a rise in interest rates on Tuesday.
According to a recent study conducted by AMP Bank, a significant portion of individuals with mortgages are feeling concerned about their ability to meet their repayment obligations at present, as well as in the event of further increases in interest rates.
Younger individuals who have taken out mortgages were experiencing greater difficulties, as a vast majority (80%) of those aged between 25 to 44 years old expressed concerns about upcoming increases in interest rates which might result in their inability to make mortgage repayments.
Approximately one in three individuals who have taken out mortgages expressed concerns about their ability to meet their current loan payments. Furthermore, half of them expressed doubt regarding their capacity to reduce their expenses further in order to accommodate potential future payment increases.
Mousina stated that a considerable segment of the populace experiences high levels of stress, and it is crucial for the Reserve Bank to acknowledge this.
"Considering that there is a strong possibility of ongoing increases in interest rates for the next month or two, possibly even extending to three months, this implies that said group of households will experience heightened financial pressure," she stated.
"That's alarming because it has the potential to push us towards a downward spiral in our economy, possibly leading to a recession."
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