The Reserve Bank is likely to give serious consideration to pausing interest rates for the first time since it began its record series of hikes, analysts say, but economists are still predicting an eighth consecutive increase when the board meets on Tuesday.
Concerns about the lagging effects of seven rate rises in as many months will be part of discussions at the monthly gathering. So, too, will the looming “mortgage cliff”, with at least $270bn in housing debt coming off historically low fixed-interest rates next year.
But the RBA is still widely expected to make it eight rises in a row at Tuesday’s meeting in Sydney. A Bloomberg survey of economists found all but one tipped a 25 basis point rise in the cash rate to 3.1% – the highest in a decade.
The RBA has been battling to rein in an inflation rate running at levels not seen since 1990. Excessive stimulus aimed at supporting the economy during Covid-19 has combined with soaring energy prices in the wake of Russia’s invasion of Ukraine in February to create a monetary morass dogging many central banks elsewhere.
Another quarter-point rate rise, if passed on by commercial banks, would typically add $75 to monthly repayments for each $500,000 borrowed, RateCity said. The 300 basis point rise since May would swell monthly repayments by $834 for such a mortgage.
Number-crunching by @RateCity on how much more those on a typical mortgage will repay per month if the RBA proceeds with a 25 basis point rate hike tomorrow. That would translate to a 300bp rise since May, adding a sizeable extra burden at a time when many other costs are rising. pic.twitter.com/KuvioCnuWV
— @phannam@mastodon.green (@p_hannam) December 5, 2022
At the RBA’s November meeting, the board weighed up either a 25 point or 50 point rate increase. They chose the former for a second consecutive month, noting “there were lags in the operation of policy” as previous rate rises took time to cool demand.
Gareth Aird, head of Australian economics at the Commonwealth Bank, said the RBA was “still flying blind to a degree”. His bank, Australia’s largest issuer of mortgages, estimates it takes about three months on average for those on variable rates to see the increase hit home.
“We expect that at the December board meeting the discussion will be between raising the cash rate by 25bp or leaving policy on hold,” Aird said. “We do not anticipate that the board will discuss the case to raise the cash rate by 50bp.”
Another factor encouraging a rise this month is the RBA isn’t scheduled to hold another board meeting until it returns from its summer break in early February.
While October’s inflation rate was lower than expected, price pressures are still mounting as energy bills swell and the effect of recent floods nudge food prices higher.
But limiting how hard the central bank will want to tighten monetary policy is the jump in repayments when fixed-rate loans expire.
“Around 35% of outstanding housing credit is on fixed-rate terms,” the RBA said in its financial stability review in October. “Around two-thirds of these loans are due to expire by the end of 2023.”
Sally Tindall, head of research for RateCity, said that transition “is going to cause havoc for some people’s budgets”, particularly if borrowers don’t shop around.
“When their fixed term ends in July next year, they could be facing an average revert rate of 7.18%, if Westpac and ANZ’s cash rate forecasts are realised,” Tindall said. “If they don’t negotiate their rate at this point, their repayments would rise by 65%.”
RateCity estimates the total amount of fixed-rate loans expiring next year is at least $270bn.
The 'mortgage cliff' will be steep for those who come off fixed-rate loans next year. @RaceCity estimates that for those who borrowed at the best rates in mid-2021 could be see their repayments jump as much as two-thirds on current forecasts unless they renegotiate terms. pic.twitter.com/ec4IXIlV90
— @phannam@mastodon.green (@p_hannam) December 5, 2022
Kristen Beadle, a liquidator and trustee at CPA Australia, said many businesses also faced the prospect of a surge in interest repayments as their fixed-rate loans expire in the coming years.
At a recent stakeholder meeting, one of the big four banks said as much as 70% of their loan book could switch from fixed to floating rates next year.
Those on interest repayments of 1.5%-1.9% would suddenly be on 5%-7% annual interest. Many businesses also have personal assets tied to their loans, Beadle said.
“My experience has been that in times like this, the directors or the business owner will actually stop paying themselves, so they no longer get a wage,” she said.
That could further sap demand in the economy and add “a lot of stress” to other markets, such as real estate, if owners have to sell off assets to keep paying back debt.
