Reserve Bank board member Ian Harper makes a shocking admission about interest rates

A director of the Reserve Bank of Australia (RBA) has made a shocking admission, saying the organization’s hitherto failed attempts to curb inflation have been “a terrible job”.

After 10 straight rate hikes, the RBA this month left spot rates unchanged at an 11-year high of 3.6 percent, after rising from an all-time low of 0.1 percent.

But the rate hikes from May 2022 to March 2023 did not have the expected effect on inflation, which stood at 6.8 percent in the year to the end of February.

“In hindsight … it looks like we did a terrible job,” Ian Harper, an RBA board member since 2016, told a panel in Melbourne on Wednesday.

As the Australian economy recovered from the Covid-19 pandemic and inflation skyrocketed, the RAB raised interest rates month after month in an effort to slow spending.

The economic theory is that if people have to spend more on mortgage payments, they will have less to spend on other things and so inflation will fall.

But it failed to plan; inflation has fallen from a 32-year high of 7.8 percent in 2022 to less than 7 percent today, but it’s not falling fast enough.

RBA officials admitted on Wednesday that the bank had been “extremely cautious” in dealing with a post-pandemic economy and said public coverage was poor.

‘When you look back, you often see things much more clearly than at the time’ The Australian reported Mr Harper said.

He said trying to stabilize Australia’s financial system and keep inflation within the target of 2-3 percent “led us to be extremely cautious.

“In hindsight, overly cautious about setting interest rates at the time.”

Michele Bullock, the RBA’s deputy governor, said cutting the cash rate during the pandemic to deal with the massive economic shock was the right thing to do, but that the bank’s reporting was “garbled.”

In 2021, RBA officials said the bank did not expect rates to rise for “at least three years,” not until “2024 or later.”

Many borrowers took this as a certainty that interest rates would remain low and borrowed more than they otherwise would have, leading to severe mortgage stress for some as rates have been trying to reverse inflation since last May.

Last November, RBA Governor Philip Lowe apologized to those who took on too much debt based on the bank’s expectation that interest rates would not rise for the next three years.

Ms Bullock said the RBA’s expectation that rates remain low is not “unconditional”.

The message has become illegible. People cling to a date… and even as we raise interest rates, they still want us to set a date for us to stop,” she said.

“We should have resisted … a little more there.”

More pain is ahead for Australian borrowers, who are now facing a 65 percent increase in their monthly mortgage rates as the ultra-low fixed rate begins to expire – and the RBA is concerned.

With inflation still well above the target of 2 to 3 percent, the Commonwealth Bank and Westpac expect another rate hike that would bring inflation to 3.85 percent in May.

But the ANZ expects that rate hike to be delayed until August.

Ultra-low fixed mortgage rates, below 2 percent, will expire in the coming months, abruptly forcing borrowers into much higher “revert” variable rates — which could rise to 7.18 percent, should there be one more RBA rate hike.

A borrower with an average $600,000 mortgage would see his monthly payments rise 65 percent to $4,163 — an increase of $2,518 — if he didn’t refinance, RateCity calculated.

Variable-rate borrowers have seen their monthly repayments rise 48 percent to $3,415 since May last year — up from $2,306 when the RBA money rate was still at a record low of 0.1 percent.

This happened when the Commonwealth Bank loan rate, for those with a down payment of at least 20 percent, rose from 2.29 percent to 5.52 percent.

While floating-rate borrowers have seen their budgets squeezed, the RBA’s Financial Stability Review for April was more concerned about the 880,000 fixed-rate borrowers whose ultra-low interest rates expire in 2023.

“On some measures, fixed-rate loans seem a bit riskier than floating-rate loans,” it said.

“Fixed-rate borrowers generally have larger balances relative to the borrower’s income and higher loan-to-valuation ratios than floating-rate loans.”

The Reserve Bank of Australia said fixed-rate borrowers also had “less time to build equity or liquidity buffers.”

“Some fixed-rate borrowers may be at greater risk of going into financial stress if their mortgage payments rise,” it said.

The Reserve Bank calculated that 14 percent of borrowers would run out of savings by mid-2024 without cutting their “non-essential” spending.

But 9 percent of borrowers would use up their savings anyway “even if they cut their non-essential spending by “relatively extreme amounts” — or by 40 to 80 percent.

Australia is facing its worst cost-of-living crisis since 1990.