Rate Rise Ruckus

This week’s decision by the Reserve Bank (RBA) to once again raise the official cash rate by 25 basis points is a record-breaking ninth straight rise to 3.35 percent. No doubt, banks will be swift to pass on the rise with standard variable home loan rates to head towards 6 percent.

If the Reserve Bank’s Governor, Philip Lowe is to be believed rates will continue to rise in the first half of this year in an effort to rein in inflation. Inflation remains stubbornly high with the December quarter’s 7.8 percent the highest figure since 1990 when variable mortgage rates were up near 20 percent.

The RBA’s clear priority (as is our Federal Treasurer’s) is to get inflation back to within the 2-3 percent target range and is “…resolute in its determination to return inflation to target and will do what is necessary to achieve that,” said Dr Lowe this week. The RBA admits that it is ‘uncertain’ as to “the timing and extent of the expected slowdown in household spending”.

The difficulty for many households is that their spending is often non-discretionary. Things like fuel, food, health, education and housing are essentials. Interestingly, inflationary pressures from the domestic economy are largely discretionary, currently running at twice the rate of non-discretionary last quarter, with spending on recreation and culture up 5.4 percent last quarter, the highest rise of any subcategory. Other discretionary items such as clothing, furnishings, household equipment and alcohol were also comparatively high compared to education and health spending, for example.

Locally, Perth’s inflation rate last quarter of 3.6 percent is double that of the next highest mover, Sydney. The ending of the $400 household electricity credit last quarter and a spike in both domestic and international travel contributed to Perth’s high inflation figure.

Inflationary pressures relating to housing includes rising electricity prices and higher construction costs relating to labour and materials. Rents continue to rise nationally up another 1.2 percent in the December quarter, 4 percent annually. Perth tops this chart also with an annual rise in rents of 8 percent.

Until households curb their spending, interest rates will continue to climb, mostly impacting the one-third of Australian households with a mortgage. Recent entrants to the property market that negotiated fixed rate mortgages of around 2 percent are in for a rude shock once these terms end later this year. A mortgage of $500,000 at a 2 percent interest rate will now cost mortgagors around an extra $9,750 each year.

The Reserve Bank, whilst acknowledging “…a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,” seems undeterred by the financial damage this will cause mostly younger borrowers.

Meanwhile, tenants whilst justifiably concerned about the rising cost of renting ought to remember the property owner’s costs of borrowing is also rising and, using the example above, by an extra $187.5 per week.

The time to collectively pull-back on discretionary spending seems to have arrived.