Michele Bullock, Australia’s next reserve bank chief, says interest rate hikes won’t hurt most borrowers as those with a home loan are likely to be wealthier

Michele Bullock, Australia’s new Reserve Bank governor, has suggested that most borrowers “can handle slightly higher interest rates” because those with a home loan are likely to be wealthier.

The Reserve Bank of Australia on Tuesday left interest rates unchanged at an 11-year high of 4.1 percent for a second month in a row, but revealed on Friday that more borrowers needed help buying food.

NAB still thinks more pain is coming and is forecasting another rate hike in November, which would be the 13th since May 2022.

In the most aggressive rate hikes since 1989, monthly variable mortgage payments have risen 64 percent in just 15 months.

In July last year, the RBA began its third consecutive hike, raising rates by a larger 0.5 percentage point for the second month in a row.

Ms Bullock told a business lunch in Brisbane that month that three-quarters of household debt was held by the top 40 per cent of income earners, while the lowest 20 per cent owed less than five per cent of the debt.

The woman replacing Philip Lowe on Sept. 18 argued that this meant interest rate hikes were more likely to hit the wealthy who could afford the higher monthly payments.

“Furthermore, households with high debt-to-income ratios that may be most affected by a rise in interest rates are also high-income households,” she told the Economic Society of Australia in Brisbane.

“Higher-income households are typically able to spend a larger portion of their income on debt service because their other living expenses tend to account for a smaller portion of their income.

“This suggests that a large number of households can probably handle slightly higher interest rates.”

Although Ms. Bullock did not become deputy governor of the RBA until April 2022, she has attended every board meeting that voted to raise rates.

The Reserve Bank’s own statement on monetary policy, released Friday, noted that those with mortgages now only need help from charities to eat.

“People with jobs are also now more likely to seek food aid than in the recent past and higher interest rates have contributed to an increase in demand for services from people with mortgages,” it said.

The RBA also predicted that mortgage payments would rise to an all-time high of 9.8 percent of household disposable income by the end of 2023 and about 10.1 percent by the end of 2024.

The Reserve Bank of Australia put interest rates on hold for a second straight month on Tuesday at an 11-year high of 4.1 per cent – but revealed on Friday that more borrowers need help buying food (pictured is the Sydney Food Bank charity)

As deputy and assistant governor of the RBA, Ms. Bullock received $533,925 last year, but her promotion would double her pay to $1,037,709 if Dr. Lowe is the yardstick.

Her existing annual wage package is also equivalent to the average Australian mortgage of $600,000.

A person paying off such a loan would see their monthly repayments increase by 64.3 percent from $2,306 in May 2002 to $3,789 today, while a variable interest rate from the Commonwealth Bank increased from 2.29 percent to 6.49 percent.

The large rise in mortgage rates has caused house prices to fall from their 2022 peaks, although the rate of decline is slowing down.

The median house price in Australia in July 2023 was four percent weaker over the year at $728,458, data from CoreLogic showed.

Ms Bullock noted that negative equity could be a problem, with a recent borrower who bought at the height of the boom in 2021 owing more than his home was worth, with a higher debt-to-income ratio.

“Recent borrowers are more vulnerable than previous cohorts,” she said.

Some households are more likely to experience financial stress than others.

“Highly indebted households are particularly vulnerable to a loss of real income due to higher inflation, especially when combined with rising interest rates, and falling house prices.”

The Reserve Bank’s own statement on monetary policy, released Friday, noted that mortgage repayments were expected to rise to an all-time high of 9.8 percent of households’ disposable income by the end of 2023 and about 10 .1 percent by the end of 2024 (pictured is an auction in Sydney’s Paddington)

Even before she takes over, Treasurer Jim Chalmers has subtly voiced a disagreement with Ms. Bullock over unemployment.

Doctor Chalmers suggested the unaccelerated inflation rate of unemployment could be below 4.25% after Ms Bullock told a luncheon in Newcastle in June 2023 that unemployment should rise to 4.5%, up from 3.5% today to lower inflation.

Inflation eased to 6 percent in June from 7 percent in the March quarter, but remains well above the Reserve Bank’s target of 2 to 3 percent.

New forecasts from the Reserve Bank released on Friday suggested headline inflation would fall to 2.75 percent by December 2025.