Millions of households are still months away from feeling the full budget impact of the Reserve Bank’s second most aggressive interest rate hike cycle in history.
Key points:
- Economists warn that home loan customers have only felt the impact of the RBA’s first rate hike
- That’s because there is a delay between the time you announce a raise and the time money is debited from an account.
- That means that by December, “there will be a fourfold increase compared to July.”
The RBA raised the cash rate target by 0.25 percentage point on May 3.
It then increased the cash rate by 0.50 percentage point in June, July and August.
“The RBA has already made an incredible amount of adjustment in a very short space of time,” said Commonwealth Bank head of Australian economics Gareth Aird.
The Commonwealth Bank is the largest mortgage lender in the country.
Its chief economist warns that home loan customers have only felt the impact of the first 0.25 percentage point.
This is because there is a time lag, which can range from several weeks to more than a month, between the time the Reserve Bank announces its decision on the first Tuesday of the month and the time the money is debited. from the mortgagee’s bank account.
“There is a lag between changes in the cash rate and the impact it has on monthly cash flow for borrowers on an adjustable-rate mortgage,” Aird said.
“Therefore, there [are] Three [interest rate increases] in the pipe yet to hit even if the RBA didn’t do anything from here.”
For a $500,000 variable-rate loan, with a 25-year term, the total extra cost amounts to a $472 increase in monthly payments, according to RateCity analysis.
The amount withdrawn from most bank accounts to date, therefore, is only a fraction of what will soon be debited.
“In CBA, for example, by December, the impact of already announced rate increases on monthly cash flow for mortgage holders will quadruple compared to July,” he said.
Aird thinks this may explain the apparent paradox of very low levels of consumer confidence coinciding with reasonably strong levels of consumer spending.
Households regress economically
This week’s Bureau of Statistics wage data (Wage Price Index) was expected to provide some budget relief for households in the form of higher incomes.
However, on Wednesday, the WPI came in at 0.7 percent for the June quarter, the same quarterly increase that was posted in December 2021 and March this year.
The WPI rose 2.6 percent for the year.
And, again, on Thursday, the Bureau of Statistics Average Weekly Earnings data point, which estimates seasonally adjusted average weekly earnings in ordinary time for full-time adults, rose just 1.9 percent.
The bottom line is that the rate at which many households are falling behind financially is accelerating.
It adds to the reduction of the family budget due to higher mortgage costs that have not yet been felt.
ANZ Bank Senior Economist Adelaide Timbrell says that, all things being equal, the growing household budget pain may linger well into 2024.
“By the end of next month, the full impact of the four rate hikes from May to August will have spread to all variable credits,” he said.
“But much of the impact of higher cash rates on households will be staggered between now and mid-2024, as fixed-rate loans mature and are replaced by higher-interest loans, whether those new loan structures loan whether they are fixed or not”.
The risk that the Reserve Bank could burden households with higher borrowing costs than they can bear has several economists, including AMP’s Shane Oliver, suggesting that the Reserve Bank may slow the pace of policy tightening. its Monetary Policy as early as next month.
“Although we are leaning for the RBA to go up another 0.5 per cent next month, we think it is close to if it goes up 0.25 per cent,” said Dr Oliver.
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