Homeowners could face more rate hikes as new Reserve Bank Governor Michele Bullock warns she “will not hesitate” to raise rates again if inflation is not further brought under control.
The stark statement comes as she admitted that the funds of low-income households have been hit twice as hard as those on high incomes.
But she offset that by saying low-income households and renters are still better off than they were two years ago, despite rising interest rates and continued cost-of-living tightness.
Ms Bullock has described the painful inflationary pressures that highly indebted households face most acutely. They have seen the cost of repayments rise as the central bank implemented its punishing interest rate hikes.
Markets now estimate a 40 percent chance that the RBA will raise rates at its November meeting for Melbourne Cup Day (pictured)
“For households with (debt), higher interest costs have reduced their cash flow more than the rise in inflation,” Ms Bullock said in a speech to a Commonwealth Bank conference on Tuesday evening.
But Ms Bullock said the effects of high borrowing costs and persistent price pressures are not being felt uniformly across the economy.
Renters, on average, have seen their financial resources increase as high inflation and rising rents have been outpaced by increases in incomes, she said.
Similarly, households not saddled with mortgage repayments have seen their savings increase since June 2021.
Amid fears that an escalation of the conflict between Hamas and Israel could keep oil prices and thus inflation high for longer, Ms Bullock said the central bank would raise interest rates if inflation remains persistent.
Reserve Bank Governor Michelle Bullock said the RBA would not rule out further increases in cash rates depending on inflation forecasts, with some households preparing for more financial stress.
“The board will not hesitate to raise cash rates further if there is a material upward revision to the inflation outlook,” she noted.
One in 20 households with a variable rate mortgage were unable to cover the costs of ‘essential expenses’, Ms Bullock revealed, citing recent central bank analyses.
One in four households with a loan of four times their income cannot cover the costs.
“These borrowers may find ways to make ends meet, but this could mean some difficult financial decisions,” Ms Bullock added.
Governor Bullock stated that these households were dipping into savings, working extra hours, or forgoing expenses that would normally be considered essential.
“At the extreme, it could involve negotiating a hardship program with their lender or selling their property,” she said.
Ms Bullock has described the painful inflationary pressures most acutely faced by highly indebted households, which have seen the cost of repayments rise as the central bank implemented its punishing round of rate hikes.
New inflation data for the September quarter, due to be released on Wednesday, will be closely watched by economists and investors. A result that beats market expectations of a 1.1 percent increase adds to the cash for further monetary tightening.
Markets now estimate a 40 percent chance that the RBA will raise rates at its November meeting for Melbourne Cup Day.
However, Ms Bullock noted that the RBA was aware of the effects of its aggressive round of monetary tightening, which typically takes 12 to 18 months to ripple through the economy.
“The administration is aware that demand growth and inflation rates have slowed, and that there are long delays in the transmission of monetary policy,” she said.